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Path finders

There are both advantages and disadvantages to being detached from a major investment house when it comes to commenting on the likely outcome of differing market scenarios. You are no longer constrained by the house view and are able to tell it as it is. However, seldom does a distinct line emerge from all the comment, putting the responsibility of coming up with a clear message back on you.

For a number of years, I found myself chairing the investment strategy committee of what had become a major manager of private wealth. My role was to direct debate, distil ideas and arbitrate on hard-fought decisions that would determine how the firm’s managers would invest their clients’ money. A thankless task, you might believe. You would not be wrong. Not only would the massaging of egos demand compromise but also sometimes the best ideas were submerged beneath conventional wisdom.

I was put in mind of these lively meetings when attending one of Bill Mott’s periodic lunches when he opines on what might lie ahead. I feel sorry for Bill at present. Not only is his fund suffering through being, arguably, too much ahead of the game but also his wife’s index-tracker fund is making his performance look positively pedestrian. That is the trouble with managing high-profile retail money – your mistakes are all too visible.

Bill, from his position at the table head – one that did not allow him to participate fully in the lunch the rest of us were enjoying – outlined three scenarios that govern how managers are investing their portfolios.

First is the imminent domestic recession approach, demanding an overweight stance in defensive sectors such as utilities, tobacco and, amazingly, telecoms. (Amazing, in that perception of this sector has reverted to a more utilitarian concept of late.)

Second is the belief that Western economies are going to hell in a handbasket and that emerging markets are the only game in town. This suggests putting your eggs in the natural resource baskets of mining and oil and favouring the developing economies of the Far East, Latin America and Eastern Europe – hardly the most attractive approach for a manager tasked with delivering an income return at least 25 per cent greater than that achievable on the major UK indices.

Decoupling was not mentioned but is implicit if you subscribe to this approach.

Needless to say, Bill does not. He is far too concerned over the growing threat of inflation in the developing world, not to mention the lack of yield available in those markets and sectors that would satisfy investors subscribing to this theory. His money, by and large, is on the third scenario, but he fully accepted that there are seasoned campaigners following these other two.

The third way acknowledges the recessionary implications of the first scenario but believes a normal economic cycle is in progress and thus those vulnerable sectors – banks, housebuilders and retailers – have already over-reacted and represent excellent value. Not that he was suggesting an immediate reversal of fortunes, rather that in three years time or so, we will look back and recognise the value that existed in these dark days.

Bill’s time will come but I really cannot be sure when. There is a fourth scenario that was touched upon but never mentioned explicitly – financial armageddon, whereby global recession combines with rising inflation to threaten the capitalist system.

I do not see it happening but the knowledge that it could goes a long way to explaining the depressed state of the markets. This could be a buying opportunity or it could still be too early. We will only know for sure with hindsight.

Brian Tora ( is principal of the Tora Partnership


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