Closing Bell: Diverse investments make sense as firms' shares take a plunge

Published on Friday 18 June 2010 20:44

LET'S start with a question. What do you think current and former employees of Vodafone, RBS, HBOS and BP have in common?

The answer is that they sadly believed they would not be taking a risk by investing most of their spare funds in their employer's shares. Such a mistake could have far-reaching consequences for many hundreds if not thousands of families in what was previously known as the Forth Valley.

For over the past 40 years or so a few thousand employees at the Grangemouth refinery owed the quality of their lives in retirement to the BP pension scheme and didn't diversify their other savings.

So far they haven't suffered in the same way as those who worked for RBS or HBOS, who watched the share value fall by as much as 90 per cent and saw their dividends disappear entirely, but it's early days. The last world energy giant to incur huge problems, Enron in the US, eventually collapsed taking with it the life savings and pensions of the workforce.

Last month I cautioned investors not to fall for the old investment chestnut that says if you track a stock market index such as the FTSE 100, you can't go wrong. Oh yes you can!

As one of the FTSE's biggest companies, BP's share price has had a major influence on the movement of the index. But in the past five years its share price has fallen at least one-third and over the past three years also by the same amount. In the past five years the FT Index is down 2 per cent and over three years down 20 per cent.

That's why we consistently advise clients and Scotsman readers that it makes sense to invest in a diversified manner with investments managed by contrarian fund managers.

For years I've recommended Neil Woodford at Invesco Perpetual, who has kept away from most banks over the past two or three years, and sold any BP and Shell shares last year because he just didn't like the sector. I've found over the years that the best fund managers often have a sixth sense or an early warning system.

This time around I'd like to champion a fund launched some nine years ago, with the aim of giving cautious balanced returns and appealing to investors who don't fancy lying awake at night worried about the latest surprise financial news. Sebastian Lyon is the manager of the Troy Trojan Fund, now more than 500 million in size. His team still looks after the private family wealth of the Weinstocks, and you don't get more cautious than them. Since inception nine years ago, looking at each calendar year, the fund has never had a negative year. And during May, while the FT Index was down more than 6 per cent, it only fell 1.6 per cent.

Since launch the total return to fund investors is more than 114 per cent, almost four times better than the FT Index. And over the past three difficult years to the end of May, over which time the Index is down 13 per cent, the total return from Trojan is up more than 19 per cent.

Within the time Lyon has managed Trojan he has never held a UK bank or insurance company because he thought they were overpriced. Last year he sold his BP shares because he felt the dividend was under threat, long before the company ran into its current difficulties.

So instead of holding too many of your favourite shares, or trying to match a highly flawed stockmarket index, or even worse, sit for years in low interest rate deposits, why not horse these ineffective investments and stick a few bob instead in Trojan.

&#149 Alan Steel is chairman of Alan Steel Asset Management.