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Time to bet against excessive pessimism

Ian Cowie

Wednesday, 8th October 2008

Ian Cowie agrees with the contrarian investor Anthony Bolton that this is a moment to buy shares, not sell them

Just as directors’ dealings often reveal more about the immediate outlook for their companies’ shares than can be gleaned from annual reports, it often makes sense to follow what fund managers do, rather than what they say. So it was a pleasant surprise over lunch the other day to find myself in step with one of the most successful investors alive in Britain today. Anthony Bolton, president of investments at Fidelity, the biggest unit trust manager in the world, is buying shares again, two years after he called the top of the bull market.

This should give comfort — and pause for thought — to the herd who are dumping stocks and share-based funds in favour of cash or guaranteed returns. Rattled by the collapse of banks and equity indices on both sides of the Atlantic, the risk-averse are seeking security at almost any price, pushing bond yields even lower and causing the most competitive deposit offerings to be withdrawn or curtailed.

Northern Rock, which can be regarded as being as secure as the British government which owns it, has scrapped its best deals. The Post Office, which enjoyed soaring receipts after word got round that its Bank of Ireland-administered deposits are covered by the Irish government’s unlimited guarantee, may not be far behind. NatWest and RBS report that the number of accounts being opened has doubled in the last fortnight and they have taken on 140 extra staff at their call centres to cope with demand.

But Anthony Bolton reckons that is not the way to bet. His opinions are worth more than most people’s because he managed the £2.4 billion Fidelity Special Situations fund for 28 years, during which time an investment of £1,000 in it would have grown to £147,000.

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jaytt

October 10th, 2008 9:57pm

Of course it'd be a mistake to sell funds now - and it should be unnecessary, as any fund manager worth his salt has already gone into defensive 'Be Prepared' mode. But whether it's the right moment to buy is a matter of great uncertainty. This bear market may run a while yet. Since Bolton published his quoted view in early October (after he bought), the market has dived another 15%. Today's levels seem very low, but might even get lower and take painfully longer to do so than the recent Gadarene rush over the cliff. There's also an important 'caveat emptor': proportional investment: better to have most available funds in cash or fixed-term, as it could be one, two or three years before the market starts to rise again, and maybe even five or six or more before the FTSE 100 is back up to 6500. (Does anyone seriously think a recovery will happen imminently?) So I'd suggest drip-feeding only small amounts of cash into equity funds, until the market tendency is clarified; and above all only invest as much as you can afford to leave invested for six years without touching it at all. For a long-term investor, valuations are all looking ridiculously low. OTOH, we don't yet know what sectors are going to emerge as winners or losers. The bail-out (which happened after Bolton's article) will affect dividends, for instance, which could hit equity income funds. Otherwise, in the short term, with the high cost of borrowing and the as yet unknown costs (e.g. taxes) from the future recession, cash and liquidity is king and may remain so for the next couple of years.

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