With Wall Street hitting new highs and even the FTSE 100 index back above 7,500, many investors will wish they had bought stocks six months ago. But what should you do now? Jump in and risk an autumn sell-off or stay on the sidelines expecting a slide? The market gives no clear answer other than the old Irish quip "if I were you, I wouldn't start from here". Ed Yardeni, a strategist and economist, points out that the US economic expansion, now ten years old, is the longest on record.
No boom, so no bust
The next recession "has been the most widely anticipated of all time, which may explain why it hasn't happened. Meanwhile, we have the most widely hated bull market of all time." Valued at 16.7 times prospective earnings, the US market looks a bit expensive, but the valuation is below the 18.6 times reached in early 2018. Earnings growth is expected to be less than 5% this year, but to be in double digits next.
Valuations in other markets are lower, but their economies and markets are less dynamic. The alternatives to equities are not attractive: with the yield on ten-year US government bonds at just 2%, in line with inflation, the real yield is zero. In other bond markets, yields are lower and real yields negative, as they are for bank deposits everywhere. It's tempting to look for value in areas of the market that have been left behind, but such a strategy could prove too clever by half. Sticking to the global funds and leaving the asset allocation as well as the stock selection to their managers is a more cautious option.
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These investment trusts were once UK-focused underperformers trading at substantial discounts to asset value, but that has mostly changed. Witan, Scottish Investment Trust and Bankers still have relatively high UK exposure, arguing that the UK market, dominated by international companies with limited exposure to the British economy, is highly international. But only Bankers (LSE: BNKR) has beaten the global index over three and five years. F&C (LSE: FCIT) and Alliance Trust (LSE: ATST) have significantly improved their performance, which has been in line with global indices over three and five years.
The star of the sector
Scottish Mortgage Trust (LSE: SMT),
Monks Investment Trust (LSE: MNKS)
Two smaller trusts with assets of £200m-£250m are also worth a look: the Mid Wynd (LSE: MWY) trust and Martin Currie Global Portfolio Trust (LSE: MNP). The former has built up a strong record investing in "growth stocks at conservative valuations". The performance of the latter has accelerated since a new manager, Zehrid Osmani, was appointed a year ago, but this could be a flash in the pan. It is one to keep an eye on.
There are no easy gains in sight, but the downside in equity markets looks limited and patience should be rewarded. Short term setbacks are always possible, but it's better to be invested than trying to finesse the next correction.
Max has an Economics degree from the University of Cambridge and is a chartered accountant. He worked at Investec Asset Management for 12 years, managing multi-asset funds investing in internally and externally managed funds, including investment trusts. This included a fund of investment trusts which grew to £120m+. Max has managed ten investment trusts (winning many awards) and sat on the boards of three trusts – two directorships are still active.
After 39 years in financial services, including 30 as a professional fund manager, Max took semi-retirement in 2017. Max has been a MoneyWeek columnist since 2016 writing about investment funds and more generally on markets online, plus occasional opinion pieces. He also writes for the Investment Trust Handbook each year and has contributed to The Daily Telegraph and other publications. See here for details of current investments held by Max.
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