Two funds for the tough years ahead

If you'd asked someone five years ago what they thought was the biggest risk to their portfolio, they wouldn't have said geopolitics.

Today, if it isn't the first thing they mention, then they clearly haven't been concentrating: we've got the usual wars on the go, but now we also have unrest across the Middle East and the threat of it pretty much everywhere else.

For this, says Pippa Malmgren of Principalis Asset Management, who I saw this week at the chartered financial analyst conference in Edinburgh, you can thank the financial crisis. Why? Because it provided a nasty supply-side shock to the global economy.

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Commodity producers are very credit-sensitive. If farmers can't borrow, they can't get seeds which is why Monsanto sales fell suddenly as the crisis unfolded. And if farmers can't get seeds, they don't plant. Miners and oil producers are also very dependent on credit to supply working capital. So when that dried up, marginal suppliers went bust. Across the board capacity was cut.

To this toxic mix we added quantitative easing and ultra-low interest rates something that forced speculators out of cash and into commodities. We took rising prices, says Malmgren, and "we chucked petrol on them". The result has been supply-driven inflation across the world, something that has hit emerging markets hard.

In the UK, we don't spend that much of our income on food. So we don't riot if the price of onions goes up by 100%. In India they do. All this causes instability. Once people start getting upset about one thing (food prices), other grievances come to the fore. So, in North Africa, everyone suddenly wants democracy and, in the likes of Bangladesh, they want their wages tripled. Fast.

But instability makes supply constraints worse no one opens more mines or plants more fields when they aren't sure who's in charge.

That's why prices are set to keep rising; why a basket of goods bought at Walmart costs 5% more than last year; and why investors need to be sure to buy innovative brands with pricing power that operate in relatively secure environments.

Malmgren's conclusion? That investing over the next decade is not going to be easy. If you are going to be in equities, "you want to be in good cash flow-generating companies that aren't impaired by debt". And once you've found them, you need to be in them for the long term. I couldn't agree more.

So how do you get this kind of global exposure to excellent companies?

I sat on a panel last week at the Baillie Gifford Investment Trust conference. One of the questions was whether the UK's big global generalist investment trusts the likes of Alliance Trust, Monks, F&C and Witan would be invented today. The consensus in the investment world is that they would not. Saying "We're just going to wander round the world buying stuff that looks good for the very long term" doesn't cut it as a marketing strategy these days.

Mostly, independent financial advisers and marketing men are looking for something that sounds a tad more exciting (China, technology, new energy sources, etc) and the very long term is too far out for investors to focus on.

Commodity guru Jim Rogers told me this week that he has an 80-year investment timeframe. That's at least 70 years longer than that of anyone else.

However, it would be a travesty if these trusts didn't exist. Why? Because while generalist trusts might not work for the industry, they are exactly what the ordinary investor wants: cheap exposure to a carefully chosen global portfolio that offers income along the way.

I wrote recently about Alliance Trust. There is a smokescreen of corporate pressure around the company at the moment (activist investors want the board to close the gap between the net asset value and the share price) but behind it Alliance is doing exactly what we all want: focusing on finding quality, price and cash flow all over the globe.

I would also suggest another global generalist trust. Scottish Mortgage has a fine record: the net value of its assets rose 22% in the 12 months to March a period when the FTSE All World index returned a mere 6%. Collins Stewart's Alan Brierley points out that the annualised outperformance of the fund over the past ten years is 4.2%.

The trust's directors and managers are looking to build "a genuine global portfolio that can deliver superior long-term growth". It also comes cheap. The shares trade on a 10% discount to the growing net asset value and the annual total expense ratio is a mere 0.51%. So, if you want a well-run fund that gives you exposure to some of the best companies in the world at an exceptionally low price, this may be the fund for you.

This article was first published in the Financial Times