WHAT is the purpose of investment? It is a timely question to ask when markets are so volatile and uncertain as now.
But barely is the question put than a host of conflicting answers are offered. “Capital protection” is at or near the top of our lists. “Income” is another. “Long-term growth” is a box often ticked, close to “beating inflation”.
We proceed with a fuzzy compromise to somehow meet all these priorities, shifting with every capricious change in market mood. Little wonder we feel failure when we cannot achieve them.
Today I propose an approach that does not claim to achieve all of these goals, but may take us rewardingly in the right direction. It is a “barbell” proposal, splitting our investment funds between two vehicles that are sharply different in focus, objective and construction.
Both are well suited to turbulent conditions. Both are open to retail investors of modest means and are available at reasonable cost from two top-flight Scottish institutions. This barbell comprises, at one end, Scottish Mortgage Trust, managed by Edinburgh investment house Baillie Gifford, and, at the other end, Standard Life’s Global Absolute Return (Gars) Fund.
Scottish Mortgage is one of our oldest and, at more than £2 billion, one of our largest investment trusts. It runs a focused and actively-managed global portfolio, concentrating on stock selection rather than index-matching. It has outperformed the global growth sector average over one, three and five years.
Its annual report and portfolio review –clearly and succinctly put together by manager James Anderson and his deputy, Tom Slater – is one of the most-informed and intelligent you can hope to find. The latest review is no exception, with an astute and well-argued defence of the trust’s investments in domestic consumer-facing China companies.
The wisdom of Scottish Mortgage – one too often overlooked in the current fashion for diversification, sector weighting, index-hugging and smart beta-chasing – is that equity investment is fundamentally about stock selection. What and where are the companies with exceptional growth potential that are investing for the future?
When you are searching for these on a global basis, that requires exploration, research and intelligence. When found, invest with conviction. This Scottish Mortgage does with a sharp discipline to keep its portfolio concentrated and focused.
Today it offers a contrarian view – and not just for sticking with China, and in particular those companies that have a heavy investment programme.
Anderson wrote: “It has been deeply characteristic of the last year that equity markets are deeply intolerant of any investment spending by companies that cramp immediate profit growth. We find this both remarkably short term even by recent standards and deeply disturbing in its implications for corporate behaviour and the global economy.”
The trust has opted for investment in internet search engine giant Baidu, now pushing into the mobile business. It also took part in a placing of unquoted convertible preference shares in Alibaba, whose merchandise volumes at one point last year were running at double that of the entire US e-commerce sector. The trust review carried an informative note by Slater on emerging technologies following a recent visit to early-stage companies in California.
I would balance an investment in Scottish Mortgage with a holding in the Standard Life Gars fund, by far the group’s most popular investment product in recent years, and which has now attracted £17bn since its launch in 2008, making it the largest open-ended investment company.
The Gars fund aims to provide returns in all market conditions over the medium to long term and pursues a wide investment remit to help achieve this aim.
A key feature of its appeal is consistency of performance. The fund follows a complex mix of trading strategies using bonds, equities and fixed-interest instruments to capture positive returns for investors. It uses futures and portfolio-hedging techniques that have proved highly adaptable in the face of fast-changing markets. It is available through all major fund supermarkets and platforms, and for a large number of financial advisers has become the bedrock of a client portfolios.
Performance has been solid, with a gain of more than 42 per cent for institutional investors over five years – a return delivered with a low level of risk and volatility. Over the past year, retail investors have enjoyed a 7.8 per cent gain; that may seem modest compared with equity market performance, but many investors prefer this consistency and low volatility.
This barbell approach seeks to balance two sharply-contrasting approaches to investment, combining a smart equity investment trust rigorously focused on global high-growth stock selection and a total return fund that offers the prospect of positive return with low volatility. I daresay there may be better combinations, but not in today’s conditions, I suspect, that many.