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Bargain buys

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20 March 2020

Amidst coronavirus concern, David Prosser looks at the potential of buying investment companies on the cheap.

Do US Presidents and their acolytes make good stock market pundits? In 2009, as the financial crisis sent share prices tumbling, Barack Obama famously suggested long-term investors might like to consider buying stocks; those who took his advice were rewarded with a 225% return over the rest of his Presidency. Similar counsel from both President Trump and his son Eric has, by contrast, so far proved less on the money; both took to Twitter at the end of February to talk up the US market, only for stock prices to plunge over the following fortnight.

Still, we should give the Trump family some time to be proved right. Warren Buffett’s much quoted advice – “be fearful when others are greedy and greedy when others are fearful” – feels as appropriate today as ever. Advisers and investors who believe stock markets will continue to outperform other asset classes over longer term periods, which has been the experience of the past 100 years or so, might well regard the corrections we have seen over the past few weeks as an opportunity.

In which case, where should you begin the search for good-value stocks amid the volatility? Well, it was certainly interesting to read Merryn Somerset Webb's column in the latest Money Week magazine making the case for the investment company sector as a potential happy hunting ground for value seekers. And there are good reasons to think she is right.

One argument is simply that with investment company share prices now trading at significantly wider discounts to the value of underlying assets than a month ago, there is a real opportunity to pick up funds on the cheap. Even funds that have traded almost constantly at premiums over the past couple of years have fallen to discounts in recent days and weeks.

Another factor is that such has been scale of the Covid-19-inspired panic on global markets, share prices have fallen almost indiscriminately. This makes little sense – the economic fall-out from the virus’s outbreak will not be felt in the same way by all sectors and industries.

Somerset Webb points to smaller company funds as a good example of an area where you might take a more bullish view, given their less international exposure and the fiscal policy actions the Government is taking to support the domestic economy. Income-producing funds will also be worth considering – the attractions of investment companies’ unique abilities to sustain dividends will be even more obvious now that interest rates look set to stay lower for even longer.

More broadly, the range of funds on offer also makes the investment companies sector worth considering now. In particular, the Flexible Investment sector, where managers have unconstrained investment mandates, offers a means with which to play with different asset classes as the market environment unfolds.

There’s also the traditional argument about pound-cost averaging to consider. A regular savings habit, easily indulged with most investment companies, will smooth out market volatility – anyone who’s fixed monthly investment is going into the markets right now is getting much more stock for their cash then a month ago.

None of which should be taken as definitive advice to buy the market – or even to buy investment companies. Statements of such certainty are better left to the politicians. But it’s just worth reminding people that the normal rules of investment don’t go out of the window during periods of even hyper uncertainty. Stick with the plan and think about whether it might be a good time to take advantage of any opportunities that other investors’ rash actions may throw up.