Bill Jamieson: Trust in US and look to long-term picture

One of the best contrarian indicators for investors seeking guidance is to look at the monthly flows of money in and out of funds. Any doubt that markets are driven by herd-like behaviour can be seen in these numbers. When share prices are rising, investors pour in money to catch the rising tide. Conversely, when markets are falling, as they did dramatically in January, investors head for the exits.

The slowdown in China  economic powerhouse for the past decade and more  continues to give concern. Picture: AFP/Getty Images
The slowdown in China  economic powerhouse for the past decade and more  continues to give concern. Picture: AFP/Getty Images

According to the Investment Association, UK fund managers saw net retail outflows of £463 million in January as private investors pulled out more cash than they put into stock market funds. It was the biggest outflow since October 2008 when the credit crunch was at its height. All too understandable, you may think. After all, stock markets suffered their worst New Year in decades.

But here we are, weeks later, with March only just under way – and markets have experienced a remarkable rebound.

The FTSE100 Index, which fell below 5,600 in early February, has now rebounded to a shade under 6,200. Investors now have cause to ponder whether they were needlessly panicked out of funds they had intended to hold for the long term. Now there are many reasons to be apprehensive about share levels. In America, company earnings estimates have been trending down, leaving stocks looking ever more expensive on historic measures.

Across the commodities sector, dividend pay-outs look at risk. The slowdown in China – economic powerhouse for the past decade and more – continues to give concern.

And central banks look bereft of ammunition to stave off deflation.

But these are reasons for caution, not for panic. And the age-old stock market wisdom looks to have been proved true yet again – the worst time to sell is when everyone else is heading for the hills. Many companies are continuing to report earnings growth and to pay maintained dividends, while innovation continues to spur wealth creation.

In this environment, it is tempting to sell even the most defensive- seeming trusts and funds on the argument that they are unlikely to produce worthwhile returns in today’s climate. But even here it pays to hold out against conventional wisdom.

Last year it seemed that Personal Assets Trust – that most ultra-cautious of funds – was barely worth holding as performance came to look lacklustre. What could be the rationale for retaining PAT in a portfolio when it was barely showing a pulse?

But recent performance shows how the most defensive-seeming funds can outperform. During January its shares rose by 1.2 per cent while the FTSE 100 fell by 2.5 per cent and the FTSE All-Share shed 3.1 per cent. Since the trust’s 30 April year end, shares in PAT barely moved – up from £350.70 to £353 – while the FTSE All-Share dropped by 11.3 per cent, giving an outperformance of 13.5 per cent over our financial year to date.

Diversification and good stock selection help explain how PAT has held up. The trust’s US holdings grew in value by 15 per cent over the period, with strong performances from US blue chips such as Dr Pepper Snapple, Altria, Microsoft and Coca Cola.

Some 21.6 per cent of the portfolio invested in index-linked bonds held up well while cash and treasury bills provided further protection against a falling market. And holdings of gold bullion edged up to 10.3 of shareholders’ funds, the price rising from its recent lows.

Alliance Trust is a giant global equity fund where investors may have been tempted to throw in the towel after years struggling against a yawning discount to net assets. The call last week by new chairman Lord Smith of Kelvin for more women directors will have further unnerved some after the turbulent era of the now-departed chief executive Katherine Garrett-Cox and chairman Karin Forseke. Surely Alliance had bigger worries than gender diversity?

But results last week showed the trust doing rather better than its troubled recent past suggests. It posted a total return over the year of 10.7 per cent, beating its global benchmark (up 3.8 per cent). Its performance put it in the top quartile of global trusts over one year and in the second quartile over three years. The divi was raised – for the 49th year in succession – to 12.43p per share including the special dividend of 1.46p.

The discount has narrowed from 12.4 per cent to 8.1 per cent. Alliance Trust Savings continues to grow though it is still struggling to break even.

Was 2015 the year to lose heart and throw in the towel, either at Alliance or at PAT? Hardly. Stormy though the weather can turn, equity investment really is a long haul game.