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Market commentary July 2009

By July 2, 2009No Comments

SUMMARY. On the 40th anniversary of the marvelous M&G Recovery fund it is a good time to review the idea of long term investing. The good news is that the omens are positive for those that are truly long term investors rather than just punters.

Are you an investor or a punter? The 40th anniversary of M&G Recovery provides a good opportunity for some soul searching. This fund, which has enjoyed the benefit of just three fund managers over its entire history, has always had an average holding period for any stock of 3-5 years, and they find themselves owning many stocks for 10-15 years. This contrasts markedly with an average holding period of about 10 months for most investors and fund managers.

Some fund managers will sneer at this pedestrian “buy and hold” strategy of M&G, but this misses the point. They don’t buy and hold. Following in-depth research at a stock level they act very deliberately to buy stocks as committed long term investors. They have clear parameters for buying stocks, applied across three generations of fund managers, and they apply them rigorously.

The results speak for themselves. The fund has achieved an annualised return of 15%, compared to the FTSE All Share of 10.4%. If you invested the same amount each month over the last 40 years you would have enjoyed a 38-fold return on your accumulated contributions, and it outperformed the index more than 70% of the time; anyone for index trackers? A long term investor in this fund will not have been shaken over the last year.

This same in-depth research should also be applied at the level of your asset allocation, which at its simplest is your split between risk assets, such as shares, and cash. It is often said that time in the market is more important thantiming the market, which is correct to a point. But when you enter the market you must glean a sense of overall valuations, which was covered eloquently in this years Barclays Equity Gilt Study. To summarise, the brutal truth of the last ten years is that valuations drive stock market returns, and you should not have too much in equities vs cash when valuations are high (or, as in recent years, when still unwinding from the sky high valuations of the tech bubble era). There is an element of hindsight here, but equally there are undoubtedly lessons to be learnt.

There is good news. The Barclays analysis cannot be used for fine-tuning timing, but does give you a broad sense of where you are in long term investment cycles. For those of you that are investors for years, not punters for months, these measures, post the Crash of 2008, are encouraging. For sure markets aren’t as cheap as they were in March, but as we endure bouts of marked weakness in the period ahead, cash weightings should be steadily reduced and equities embraced.

Dennehy Wealth