Is it time for investors to rethink their investment strategy?

When it comes to investment, it is very difficult to spot moments of inflection as they happen. Later on, you can often look back and pinpoint a turning point – or, indeed, reflect that what felt like a significant moment was nothing of the kind – but calling it as it happens is tricky. Still, right now, it genuinely does feel as if the wind is changing direction in the markets.

One reason for that is the remarkable volatility we’ve seen in US tech stocks over the past week or so, including the incredible sell-off of Facebook-owner Meta; in just one trading session, it lost more value than the total market capitalisation of any single UK company.

More fundamentally, the economic backdrop is shifting before our eyes. All of last year, we were told that spiking inflation would be a transitory phenomenon – and that a monetary policy response was thus unnecessary. Now the Bank of England thinks inflation will surpass 7% within months and persist at above-target levels for two years. Its Monetary Policy Committee was spilt last month between members who wanted an interest rate rise and those who wanted a larger increase.

“When the facts change, I change my mind,” the economist John Maynard Keynes is often credited with having said. Well, the facts do seem to be changing – so do investors and their advisers need to rethink their strategy?

One analyst who thinks the answer may be yes is Algy Hall of Investors Chronicle magazine, whose monthly Alpha Investment Trust reports often make interesting reading. Hall uses a screen based on criteria measuring both the value that investment companies offer, based on recent movements in the discounts or premiums as their shares trade relative to the value of their assets, and the momentum, based on three-month share price performance. What you get from that is a selection of funds making good progress while still offering value.

The latest Alpha selection underlines the perception that change is afoot, containing a string of new names compared to the results of recent screening exercises. Those new names can broadly be divided into two groups: funds offering exposure to alternative assets associated with inflation protection, and equity income funds.

The first of those groups includes Civitas Social Housing, which earns returns from inflation-linked rents, and Black Rock World Mining, which benefits from rising commodity prices. In the second category, stand-outs include City of London, Murray Income and Temple Bar. All three are stalwarts of the equity income sector.

The fact these investment companies are finding favour should not be a surprise. The investment companies industry, after all, offers a really useful route into alternative asset classes that most investors find difficult to analyse for themselves – or even to access, for that matter.

The attractions of equity income funds, moreover, are well-documented. The fact that investment companies, uniquely, are entitled to retain dividend income in order to subsidise pay-outs in lean years continues to prove valuable. And what could be more attractive, in an inflationary environment, than funds with decades-long records of increasing dividends year-on-year?

This is a fascinating moment. In many ways, it is remarkable that the Covid-19 pandemic has had such little impact on investment returns, other than in the first quarter of 2020, when the arrival of the crisis caused a rapid sell-off (since recovered). Now, however, the effects of the pandemic do appear to be playing out with greater drama. And that certainly requires pause for thought.