Regular readers of this column will know I have been optimistic in my outlook for stock markets for some time, particularly in the UK.
However, the Investment Association UK All Companies sector saw outflows last year, and pessimism is rife. Indeed, I heard an IFA declare the UK as un-investable just a few months ago.
In some ways, this only reinforces my positive view. Such a level of negativity is usually an excellent indicator of an upcoming boom. And I am in good company. Neil Woodford recently tweaked his equity income fund to have more exposure to domestically-focused companies, as he is more bullish on the UK economy too.
Meeting the argument head on
That said, stock markets have a nasty habit of making fools of us and can humble even successful and experienced managers.
So, this week, I decided to take a look at a manager who holds the opposite view to my own. Peter Spiller fits the bill nicely. The man behind the launch of Capital Gearing Investment Trust in 1982, Spiller is particularly bearish in his outlook.
His philosophy is to make money in the good times while protecting the portfolio from negative shocks: a twin aim few succeed in. The success of the strategy also relies on Spiller’s correct analysis of the macro environment – another extremely difficult skill he has mastered over a long career.
At £170m, Capital Gearing is small and, as it seeks to exploit discount opportunities in investment trusts, is not scalable. However, last year, Spiller opened the Capital Gearing Absolute Return fund. It holds the same objective of growing wealth over the long term and preserving value over the short term but is much more scalable as an open ended fund.
The asset allocation is a reflection of the manager’s present view of the world. As his outlook is pessimistic at best, he has shifted the portfolio into wealth-preservation mode.
Central banks and politicians have backed themselves into a corner, according to Spiller. Consumer debt has climbed even higher than its 2008 level: house prices have risen strongly and people have been encouraged to borrow more in an effort to boost consumption.
Meanwhile, interest rates have fallen to record lows and central banks are unable to raise rates by more than a smidgen for fear of causing mass loan default. The only option left is to inflate the debt away. As a result, Spiller expects a re-run of the 1970s, with double-digit inflation. Unlike the 1970s, however, interest rates will remain low – at least initially.
This expectation of increased inflation is the source of Spiller’s pessimism. The positioning of the fund is therefore highly defensive, with an emphasis on dollar exposure and inflation protection. Exposure to risk assets, mainly via investment trusts and gold, amounts to around 37 per cent, with the remainder held in index-linked and corporate bonds, and cash.
Following a strong period of performance, there is limited value in index-linked bonds. Spiller favours American Tips, which at least offer a positive return – more than can be said for UK’s equivalent, index-linked gilts.
There will be a point in the future whereby he will increase exposure to risk assets and switch the portfolio back into wealth-accumulation mode. This is likely to be when the rest of the market is bearish and moving in the opposite direction.
But the problem with all macro calls is they can take a long time to play out. Personal Assets Trust’s Ian Rushbrook, for example, correctly anticipated the 2008 financial crisis but was years too early. He therefore missed out on a large portion of the spectacular gains prior to the event.
That said, an important aspect of a diversified portfolio is a variety of views. Spiller is more cautious in his outlook than most but, importantly, is not afraid to shift the portfolio as things change.
This could be a great fund to hold in order to have the decision made for you when the time comes. Whether you are bullish or bearish, it would be wrong to dismiss a man of Spiller’s experience.
Mark Dampier is head of research at Hargreaves Lansdown