Peter Walls, manager of Unicorn Asset Management's Mastertrust Fund tells MoneyWeek where he'd put his money now.
The summer months rarely produce rampant bull markets and 2004 has been no exception. Indeed, from both a technical and fundamental point of view, it would be tempting to say that, when it comes to equity markets, I wouldn't be investing in anything right now! The list of negative factors is endless: interest rates, the surge in the oil price, growing geopolitical risks, the plight of over-extended consumers Little wonder then that private investors are shunning equities, as evidenced by the 82% year-on-year fall in net retail sales of unit trusts/Oeics in June.
However, there's also a contrarian streak in me, which makes me look at the clouds and detect more than a hint of silver lining. The negatives have been so widely chronicled, the markets' performance so lacklustre, that it is time to remember the old adage, if it's in the press, it's in the price'. Rates are not simply rising to stall the housing market, but also in response to the recovery taking hold in the industrial and business-services sectors. Expensive oil is a problem, but inflationary fears have been over blown. A 30% rise in crude translates into only a 4.5% rise in the petrol price, for example.
As for geopolitical risks, surely it was ever thus; years of further atrocities and political upheaval may be on the cards, but business goes on. And while the UK consumer is likely to come under increasing pressure via a combination of higher debt financing, rising taxation, low wage price inflation and increasing utility costs, there is still growth in many of the wealth-producing sectors of the economy. Accordingly, Unicorn's equity funds have virtually no exposure to the debt-driven, consumer-related areas of the market, but we are seeing a steady flow of upgrades and positive trading statements from real economy' firms. There are bears around every corner, but most of the dangers have already been discounted by the market. Indeed, those refusing to buy now are simply contributing to the tendency to buy high and sell low.
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The fund I manage, Unicorn Mastertrust (which invests in investment trusts), has been heavily weighted in cash over recent months. I am now tempted to commit these funds to the market and expect in the coming months to add to a number of existing positions, including Aberforth Smaller Companies Trust and Prelude Trust.
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The Aberforth Trust should provide strong relative performance on a two to three year view, as its well-diversified portfolio of value-oriented stocks benefits from reasonable earnings growth, and merger and acquisition activity. The Trust's management team have a consistent long-term record and only tend to underperform when markets move into bubble territory. As I am not expecting another bout of this for a good few years yet, this Trust should serve me well into recovery. Conversely, if it's me, not the bears, who is suffering from stockmarket delusion, Aberforth's value approach ought to offer some downside protection.
For added spice, consider Prelude Trust. The shares have almost doubled from their lows, and this venture capital trust specialises in backing unquoted, early stage technology businesses. A number of Prelude's more mature investments are likely to be realised over the next two years. In the meantime, I am happy to add to my holding at the prevailing discount to assets, which exceeds 30%.
