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Stay-rich trusts, not get-rich trusts

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31 August 2018

With the US market recording its longest bull run in history, David Prosser looks at what investment companies with capital preservation strategies could offer.

For stock market watchers who get excited about share price statistics, last week offered quite a moment: the US stock market recorded its longest bull run in history – a 3,453-day stint (nine-and-a-half years) with no major correction. Happy news you might say, and many global markets have risen alongside the US. But what happens when the good times finally come to an end? Will the hangover be all the more painful for the length of the party?

Long-term investors and their advisers know better than to second guess market timing – calling the top of a bull run is no easier than spotting the bottom when prices are falling. But there’s no doubt volatility at least has returned to global equity markets this year, even if we’ve not seen a crash. And the rise and rise of prices is now accompanied by a surge in the number of bears predicting a downturn, often with increasing volume.

Against this backdrop, more investors are reconsidering their asset allocation strategies. They make a tempting target for the marketing machines of the fund management industry, which specialises in innovative new solutions to problems investors think they have. Look out for a concerted attempt to persuade investors to move their money into target or absolute return funds, for example.

The investment company sector tends not to go in for structured investment products built on financial engineering, but that’s not to suggest closed-ended funds will have no role to play for investors seeking safety in the months ahead. It has become fashionable in recent times to talk about the value of multi-asset vehicles that diversify the risk, but the investment companies sector has offered such funds for decades.

Three such funds are profiled in the latest issue of Money Observer magazine, which highlights the strong long-term performance records of RIT Capital Partners, Personal Assets and Capital Gearing. These are funds focused on wealth preservation or, as the magazine puts it, “stay-rich trusts, not get-rich trusts”.

The point about these funds, which are in the AIC’s Flexible Investment sector, is that the managers operate with unconstrained mandates. Such funds – there are almost 20 in the sector - have the freedom to invest across a variety of asset classes and to set their allocation models as they see fit for the prevailing market conditions.

At times they may be very heavily invested in equities; on other occasions, their portfolios are skewed towards more defensive assets. They also have the option of dipping into unconventional asset classes such as hedge funds, unquoted equities and credit markets, as well as listed equities and bonds.

Right now, the managers of all three of the funds profiled by Money Observer are deeply sceptical about the sustainability of equity markets at their current valuation levels. Accordingly, their stock market exposure is limited – to around 37 per cent in the case of Personal Assets and RIT Capital, and to just 16 per cent at Capital Gearing. Exposures to fixed-income and property holdings are higher.

These managers may be proved wrong, of course, and investors who disagree with their analysis will steer clear of these funds. The more important point, however, is that these funds provide cautious investors with another option – and one that has been tried and tested over several market cycles.

One final point: the Flexible Investment sector is also a bastion of active fund management at a time when index trackers have been hoovering up ever greater sums. The case for passive management is that so many active managers fail to outperform in rising markets, but one thing you know for certain about an index tracker is that it will take a dive when markets fall. Active management of the type offered by these vehicles may just be set for a return to favour.

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