Long-term investors can ride out the stock market's darkest times

Published on Friday 20 November 2009 18:36

OVERLOADING investment portfolios with perceived low-risk equities such as British banks is a dangerous ploy as Ken Taylor pointed out in last week's Closing Bell.

It's undeniable that investors who felt uneasy about equity markets last year and went largely into cash prior to autumn 2008 avoided much of the stock market losses. However, if hadn't been for the quick action of Ben Bernanke in the US, and other central bankers, deposit investors could have lost the lot.

But isn't there a better way to create wealth over the long term than guessing when to sell equities? You have to get both decisions right – when to sell and when to invest again – and that's not easy.

Let's go back 40 years for an example of how long-term investing should work. In 1969 recession was looming, equity investors were having a rough time and a favourite blue-chip, Rolls-Royce, went belly up. Then came the horrendous stock market crash in October 1973.

Yet 1969 was the year that the M&G Recovery fund was launched. Fund manager David Tucker took charge until 1987, retiring not long after the stock market crash that year. So that wasn't a good year to take over, but in stepped Richard Hughes to run the fund until he departed in 2000.

What a relief that must have been for him, as stock markets were plummeting thanks to the bursting of the dotcom bubble. Who would be daft enough to take over at that point?

That's when Tom Dobell stepped into the breach, and he's still there today. That's only three managers in 40 years. Each one took charge when it seemed the worst possible time. So what's their record? If you had invested 1,000 in May 1969, by 1 November this year your investment would have grown to 360,000 after charges, outperforming the UK stock market index six-fold and deposit investments by at least a factor of 30.

The fund's success can largely be attributed to the fact that each one of these managers believed in the same strategy: buy shares down on their luck when nobody loves them and hold them for an average of four to five years. That's a big difference from the average fund manager, who holds for only six months and chops and changes. In my book that's high-cost speculation, not sensible investment.

David Tucker's success allowed him to retire early, but at 70 years old he is still an investor in the fund. In a recent interview he said he envied the current fund manager because he couldn't remember a time when there were so many opportunities for this fund to make serious returns over the next four or five years.

But it's not just about the UK. If you look at a comparison of global GDP, measuring the income of world economies at the end of 2008 compared with ten years ago, what's striking is the dramatic growth of developing countries. Their share of global GDP is up 300 per cent in real terms over the period. A big part of that story is commodities demand. The JP Morgan Natural Resources fund, which benefits from demand from developing countries, is up 140 per cent over the last 12 months, and by 660 per cent over ten years.

So is it more risky to invest in what's obviously a long-term trend? As always, investors should invest for the long haul with quality managers who invest in companies whose future prospects are correlated with global growth.

&#149 Alan Steel is chairman of Alan Steel Asset Management www.alansteel.com