Benefits of long-term investment approach come to the fore

FOR some time now the single most important judgment that investors have had to make is where they sit in the inflation versus deflation call. I have lost count of the number of dire warnings that have been issued over the last two years about imminent inflation making full exposure to equities the only sensible strategy.

It is therefore interesting to note that more recently, a growing number of respected strategists have moved to the "lower for longer" camp when judging interest rates. Inflationary pressures will return in time and interest rates will move upwards, but the key call will be identifying when this has occurred.

For now, any semblance of a recovery in the UK is so fragile that raising interest rates would result in an immediate stalling of momentum. Remember, this is being written prior to the austerity measures being formally announced and implemented.

Another point that was discussed in all the meetings this week was the IMF's endorsement of the UK's proposed budget deficit reduction programme. The real significance of this comment is that no such proposals exist in the US, which seems happy to continue printing money for as long as is deemed necessary. In other words, it is simply creating more and more debt.

This stance has prompted several very experienced and talented fund managers to be extremely bearish on markets. This is not to say they are right, but the managers I am referring to have managed money successfully for long periods, and are not simply bull market operators. It would be dangerous to ignore their views.

The overall mood among the fund managers I have met up with this week is not particularly negative, however. There seems to be a growing acceptance that things have changed, and we are perhaps facing a future that is in some respects different to what has gone before.

Certainly anyone who suggested that the bear market was over two years ago because history told us it needed to be was mistaken, and it is clear that the recovery period this time will be prolonged, sluggish, bumpy and challenging.

Investor expectations need to be adjusted accordingly. With a base rate of near zero and inflation in low single numbers, a total return of around 6 to 7 per cent is highly desirable. The challenge therefore becomes what level of risk requires to be taken to achieve such a return?

This point is crucial, and it was very interesting to hear of the strategies being proposed by fund managers to meet this challenge. Several mentioned the growing awareness among investors of the "lost decade" in equities. It is something I have written about in this column before, and is becoming more widely debated. It is simply another dynamic of recent times, where too many people have grown tired of the stock market, having failed to make money for a 10-year period.This is a huge subject in its own right, but can partly be explained by the cult of people shunning professional advice and buying tracker funds. Perhaps they now understand that such funds are cheap for a reason.

I came back to Scotland from my fund manager meetings in London earlier this week feeling genuinely energised. It is easy to become despondent, and certainly the immediate outlook for many people is worrying, but I also believe that out of all this comes opportunities for investors.

It simply requires an acceptance of change, a resetting of expectations and a commitment to remain in touch with the performance of their capital.

• Ken Taylor is director of Mackenzie Taylor Wealth Management