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Issue 1018, 25 September 2020. Subscribers: read the digital edition here

From Merryn Somerset Webb, MoneyWeek editor-in-chief

Listen to financial experts at the moment and you will regularly be told that you need a large part of your portfolio in alternative assets – and that one of the best is private equity. All the real growth in the corporate world is here – so your money should be too. The first bit may be true: listings are picking up now but good growth companies have been staying private longer than in the past. However, the second is not. The vast fees charged by private equity (think 6%-7% a year with performance fees, says Jonathan Ford in the Financial Times) tend to gobble any growth there is. There may be outsize returns on offer – but mostly only for the managers, says Ford. 

This comes as no great surprise to us. We tend to favour listed equities over most other investments, most of the time. That’s partly because they tend to be easy and cheap to get in and out of; partly because over most ten-to-20 year periods they have delivered inflation-beating returns; and partly because there is a kind of honesty in stockmarkets. Liars get found out; bad companies are, over time, penalised; and good ones rewarded. In the end fundamentals have always mattered. 

However we are getting a little worried. This week, John looks at the idea that this basic honesty is vanishing, driven by the rise of passive investment vehicles. Their prevalence – and huge popularity among the young – might be changing things. In a world where the money that comes into the market buys all of the market, is there room for discussions of earnings, price/sales ratios, book values and the like? And if not, are markets now finally completely divorced from fundamentals? Does nothing matter except for the flows of cash in and out of passive vehicles? John thinks that might be so – which in turn suggests our latest stockmarket boom is far from over. See this week's cover story for what he thinks you can do (hint: beyond being nicely diversified, not much).

Our other writers are on board with the idea that things are a little different these days. This week, we look at the thought that with new lockdowns on the way, tech stocks are the “new safe haven”. David Stevenson looks at some of the better funds investing in Europe’s growth stocks. China is still interesting – Baillie Gifford has relaunched a trust with a China focus that we suspect will do well. We also remain keen on Japanese stocks – which seem to have taken the shift from Abe to Suga  in their stride. 

In the UK, things are a little wobbly thanks to the obviously horrible hit UK firms will take from the new Covid-19 restrictions. The UK economy has so far seen a satisfyingly V-shaped recovery. We’ve noted before that the extent to which this can continue will be very much driven by the choices Boris Johnson’s government makes. We are far from convinced it has made the right ones (see last week’s piece on dodgy Covid data). Another reason (to add to John’s thoughts on passive) as to why, keen as we are on value investing in the increasingly cheap UK market, we are preparing to wait for longer than we had thought we would have to, for it to come back into fashion.

Finally, a note on pensions – while agonising over how to protect your money in markets, don’t forget to ensure you have covered rather easier ways to future-proof your income – in this week's magazine, Ruth Jackson-Kirby looks at how to get the maximum state pension.