Each week, a professional investor tells MoneyWeek where he'd put his money now. This week: Tim Cockerill, head of collectives research at Rowan Dartington.
The confidence we saw in markets at the start of this year has been evaporating as global economic problems re-assert themselves. The biggest issue from Britain's point of view is Europe. Here, there are two key concerns: Spain's debt situation and the French elections.
Neither of these are new problems. The Spanish debt pile has been known about, discussed and analysed for a long time, so it shouldn't really come as a surprise. Meanwhile, the French presidential election front runner, Franois Hollande, has been the clear leader for some time. Yet the markets have suddenly started to panic. This sudden change of heart reflects investors' preoccupation with short-term events, and macro and political issues in particular.
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This tendency has only been getting worse, according to a recent piece of research from Standard Life. The group found that global stock prices have become much more correlated since 2007, and that investors' behaviour is increasingly being driven by the short-term macro outlook. Exchange-traded funds (ETFs) have grown in size significantly particularly in America and now account for 25%-30% of American stock trading. Inflows into ETFs in the US have totalled $400bn and another $150bn has been invested in hedge funds with global macro strategies.
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This focus by investors on short-term forecasting means the market is losing sight of the long term. Yet both the long-run stockmarket data, and the weight of evidence from studies of behavioural finance which show clearly just how poor investors are at predicting the future suggest that those investors who keep taking a long-term view should be at an advantage. As both Standard Life and M&G have pointed out, the environment for stock pickers has got better and better as macro-dominated investment grows in influence. With this in mind, here are three funds that I think are worth buying.
Two themes are played out in the new Schroder Smaller Company Discovery Fund (0800-718777). The first, naturally, is smaller companies, which have been one of the best-performing asset classes over the long term. The second is investing in higher-growth regions, such as Asia and emerging markets. This could prove a strong combination in the long run.
My second pick, the M&G Global Dividend Fund (0800-390390), invests in companies with very consistent dividend-paying records and which focus on their dividend policy as a central part of their strategy. Some of the companies within the fund have grown their dividend for more than 20 years. These types of companies suit an investment policy that is focused on a buy-and-hold strategy, allowing the fundamentals of a good business to be reflected in an increasing share price over the long term.
Another important aspect of taking the long view involves finding companies whose strengths competitors find hard to replicate. Such firms typically generate above-average profits over long periods of time. The Liontrust Special Situations Fund (020-7412 1700) has incorporated this approach in its investment process. The trust refers to this strategy as spotting the economic advantage'. It identifies intellectual property, distribution channels and recurring business as key strengths that any business needs in order to be able to rise above the competition. The benefits of such strengths come through over the long term.
In summary, all three funds have aspects to their strategies that tie them into a long-term investment horizon, and so should perform well in a market that is so heavily focused on short-term events.
