Yesterday was brutal. Today, things have calmed down a bit. Is it a “dead cat bounce”? Quite possibly. But unless you’re a day trader, you shouldn’t really care.
Yesterday was the kind of day when people sell things indiscriminately. A day when the good got chucked out with the bad. So I think it’s time to take a little wander through the wreckage, looking for items of interest.
Be aware of what’s in your portfolio and why it’s there
Days like yesterday don’t happen often in markets. (That said, when they do happen, they all tend to cluster together, so be braced for repeats in the near future). So what can we learn from it? And is there any way to benefit from it?
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I’m going to focus on investment trusts here today, for two reasons. One, I think they’re the best vehicle for active management. Two, there's the potential for gaps to open up between the share price and the underlying portfolio’s value (net asset value, or NAV), which means there should be the chance to nab trusts at a discount.
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With that in mind, what do we see? On my first point, good active management can make a difference when combined with sensible portfolio diversification. I’m going to focus on the boring funds here, as the contrast is most obvious. Defensive stuff can feel like a waste of good capital during the good times. The fund managers come in for a fair bit of flak. There are a lot of snide comments from permabulls. But as long as you choose correctly – and I have to emphasise that – they really can be a lifesaver in a crisis like this.
Yesterday, most major global stockmarkets fell by about 10%. And, since Monday’s open, the FTSE All Share is down by about 16% over the same period (at least, as of the time of writing, which is first thing this morning).
But the solid defensive trusts are doing their jobs. As Gavin Lumsden of Citywire points out, Personal Assets (LSE: PNL) trust – one of the investment trusts in our model portfolio – fell by 1% yesterday. It's down about 4% since Monday. In the context of the wider market, that’s nothing.
Ruffer (LSE: RICA) was flat on the day, and it’s up 8% since Monday’s open. Imagine that in a week like this.
Even RIT Capital Partners (LSE: RCP), which is arguably a bit riskier than those two, was down just 2.2%, and has only lost about 4% on the week.
This is why it’s so important to understand your portfolio and how each holding fits into it. You don’t own these trusts because you expect them to turn into the next Scottish Mortgage. You own them for times like these.
Are there any opportunities out there?
The second point I want to make is this: markets might well fall further from here. In fact, if you asked me to take a straightforward bet as to whether this is the bottom or not, I would quite firmly say “not”.
As I said, it’s going to be hard for people in the world’s financial centres of New York and London to maintain their equilibrium when they’re all working from home, the streets are half-empty, and coronavirus cases are climbing exponentially, as seems likely. That’s just human psychology.
At the same time, long-term active investing is not about locating tops or bottoms, fun as that may be. It’s about buying stuff when it’s cheap and selling or avoiding it when it’s expensive. That is much, much easier said than done, but sometimes it’s useful to remember that, particularly at a time like this.
So where might there be opportunities worth monitoring, or even buying right now?
This may come across as a little boring, for which I apologise. But rather than look for the distressed assets right now (which could get a lot more distressed), I’d suggest looking for the decent quality trusts that you can now buy at much lower levels than you could a month ago.
Yes, there are good reasons why these trusts are now cheaper. That’s because the companies they own will not be making as much money. However, if you have managers who proved that they can do a good job over a long period of time, then chances are, they’re going to be able to react more effectively to this particular slump as well.
Also, any contrarians worth their salt should be having the time of their lives. (Or at least, they should be about to have the time of their lives.)
On that front, I’m interested in The Scottish Investment Trust (LSE: SCIN) which offers an interesting mix of relatively defensive equities (such as Tesco and Glaxo), some gold mining, and some resources exposure (Shell, BHP). The dividend yield is currently around 4.7% and the discount around 12%.
I’d also take a closer look at Fidelity Special Values (LSE: FSV). The share price is down about 30% in the last month (tracking the market lower effectively) but manager Alex Wright seems to think there are lots of opportunities – as specialist broker Numis points out, he has increased the gearing (level of borrowed money) in the trust from 3% to 12%.
The portfolio has exposure to a lot of defensive stocks, plus cyclicals that aren’t directly affected by coronavirus. Wright has dumped any airline holdings. The trust currently trades at around the NAV (so you’re not getting a discount but prior to the crash, it was trading at a premium of nearly 5% at times).
This is just a sample – I’m also intrigued by the likes of smaller-cap specialists with a proven record, such as BlackRock Throgmorton, but we’ll have more on all that in next week’s issue of MoneyWeek. Subscribe now if you don’t already.
