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Archive for the ‘Q and A’ Category

The truth about future economic growth

Rob Arnott, the chairman of Research Affiliates, is one of the most articulate and interesting market analysts in the States, and someone whose ideas and research I have followed for a number of years. In my latest 30-minute podcast, I discuss with him the outlook for investment returns – and how they will be dramatically influenced by what he calls the three Ds now hanging over the world – debt, deficits and demographics. All three are conspiring to drag down likely future rates of economic growth in the developed world. Investors need not despair however, Rob argues: better returns are available if investors switch their focus from conventional benchmarks to a multi-asset strategy based on broad economic, rather than purely financial, criteria. Before listening in, click the link below to download a copy of the slides he used to develop his arguments at a recent presentation to a London Stock Exchange seminar. The podcast can be downloaded from here. Recommended.

Arnott LSE Presentation July 2012

Written by Jonathan Davis

July 29, 2012 at 5:30 PM

Talking markets: Jim Rogers

Global investor Jim Rogers thinks that the world is heading for an economic depression unless political leaders finally grasp the nettle of the debt burden they have accumulated over the past decade. He is not optimistic about the outcome. Bankrupt countries such as Greece need to default – and soooner rather than later. The longer they leave it, the worse the eventual outcome will be. Hear more of this – and how Jim is seeking to protect his own wealth in these difficult times – in my latest podcast, a 30-minute interview with one of the smartest investors I know. It is available to download from the Independent Investor website now. An edited transcript will be available in the New Year.

Written by Jonathan Davis

January 3, 2012 at 5:56 PM

Q and A with Jim Rogers

Jim Rogers, who co-founded the Quantum Fund, regularly speaks his mind on the outlook for global markets from his new home in Singapore. I have been talking markets with him for more than 10 years. In a Q and A session with Independent Investor, he offers his latest views on China and Korea, on the dollar and the euro, and on gold, silver and other commodities. Here is a short extract from the 20-minute conversation.

I’d like to start by asking you to explain what you think has been happening in the markets in the last month or so. They’ve been very jittery – we’ve had the Eurozone crisis, we’ve had the Israeli situation, we’ve got worries about Korea and so on. Are these worries you share, or is this just normal market action that we’re seeing here?

I hope you and everybody is worried too because, you know, we have great imbalances in the world that have to be sorted out. I mean, we’ve got gigantic debtors in the West, and gigantic creditors in the East, and we’re going to have more problems: more currency turmoil; we’re going to have more financial problems – this is not over yet.

Some people are saying that there is a serious risk of returning to a re-run of 2008 and the banking crisis – is that something you share?

Well, of course I do. There’s no question about that. It may not be the same actors, it may not be the same format, but, again, the United States essentially is bankrupt, the UK essentially is bankrupt. There are a lot of companies and countries in Europe which are getting a lot of press right now, but nobody can pay off these debts.

If you would like a transcript of the full 3000-word interview, please email me at editor@independent-investor.com. The full interview, and others in the series, will be available free of charge for subscribers to read or listen to on the new Independent Investor website. This is currently in beta format and will go live shortly.

Written by Jonathan Davis

June 15, 2010 at 5:48 PM

Posted in Jim Rogers, Q and A

Q and A: Richard Oldfield

Richard Oldfield, the subject of our latest Q and A, is the founder and chief executive of Oldfield Partners, a privately owned investment management firm with $2.8 billion under management, invested wholly in equities “on a concentrated, value-focused, index-ignorant basis”. He is largely unknown outside the professional world, but highly regarded within it.

Before founding Oldfield Partners in 2005 he was for nine years chief executive of a family investment office. He is chairman of the Oxford University investment committee and of Keystone Investment Trust plc, and the author of Simple But Not Easy, a “slightly autobiographical and heavily biased book about investing”, first published in June 2007, which I strongly recommend and praised in The Spectator.

How generally do you see the equity markets at the moment?

We are torn between the extreme gloom about the problems of the public sector and enthusiasm for the new strength of the private sector, with strong cash flow and balance sheets and evidence of much improved demand, and valuations which are not too high. On balance we think it is positive for equities (which is a bias, but not an invariable bias, of ours).

Is the crisis in the eurozone over yet?

I think the outcome is resting on a knife-edge. On balance my sense is that the crisis will pass, and the euro will survive, at least for now. The stakes are too high for governments to let it go. I have always said however that the euro was unlikely to survive for more than 15 years, and I stick to that.

All that talk of the euro becoming a new reserve currency can be discounted. It isn’t going to happen. Central banks are not going to be rushing to buy more euros if they think they might be getting drachmas instead. On that basis that the euro does survive for now, however, that should mean we get a decent market rally.

What is the best approach to adopt in this kind of market?

The cushion of comfort is very important: risk is high. Investors need to be sure they have enough in low-risk assets so that they will not fret too much about the higher-risk ones. But once this cushion of comfort is determined, a different figure for every investor reflecting not only circumstances but temperament, investors shouldn’t be too shy of holding equities.

The answer I think you are begging with this question is “buy and hold is dead – do we need a trading strategy instead?” I am not too sure of that. The time to be skeptical of buy and hold was, in hindsight, in 2000 before equities gave a negative return for ten years.

Now, on the contrary, buy and hold may be a little hairy – hence the importance of the cushion of comfort – but the odds of an average to above-average return over the next ten years seem to me to have risen, particularly with quality stocks which really are for tucking away for the long term.

What opportunities do you see? Are there any striking valuation anomalies?

Not many major anomalies at the higher level – sectors or country. Japan though is cheap and maybe now the catalysts to this cheapness getting recognized have increased – a weaker yen, and a government determined to stimulate consumption. Quality equities, by which I mean major companies with low debt, strong cash flow, relatively unvolatile earnings, and high return on equity, do look good value.

There are plenty of anomalies, we think, at the stock level. Some excellent companies are becoming extremely cheap. The only question is whether the good companies in the private sector are going to get crushed by the public sector. On balance I still think that is unlikely.

Please give some examples of stocks you have been buying and why?

The most recent purchases this year have been Fiat and Hitachi, both based on the sum of their parts. Hitachi has been a dismal story, but there are signs at last of management change to sort out this amorphous conglomerate, and the stock is extraordinarily cheap.

Fiat is only the fourth car company we have bought in 30 years. Car companies are terrible – high debt, highly cyclical, usually union power – but in return for their terribleness there is occasionally huge upside and we think we have it here.

What would you avoid (or go short of) and why?

We would continue to be wary of China.

What are your thoughts on gold, bonds and property?

Gold: having been a bull for the last ten years, I am now wrongly somewhat more skeptical. The conditions still appear classically good for gold, but everyone is already there. On bonds, I am afraid, we are entirely consensus in being negative. Property – no clear view.

If you had just one moneymaking tip for this environment, what would it be?

But we don’t (and, seriously, we don’t believe in having one good idea; we think a portfolio should have a lot of decisions at play in it). Don’t stray too far from your comfort zone is the most important thing.

Written by Jonathan Davis

June 1, 2010 at 2:57 PM

Market Q and A: Bill Mott

Bill Mott is one of the UK’s longest serving and most experienced equity income fund managers. For many years he ran income funds for Credit Suisse and after taking a break for a few years is now doing the same job at the boutique firm of PSigma Investment Management. In this Q and A he describes how he is positioning his holdings for the future.

How are you positioning your fund now?

There are a number of different themes in the portfolio today.

1. Search for Yield

Interest rates will remain very low because the eventual removal of Quantitative Easing and the inevitable heavy tax increases will be sufficient to slow the UK economy. Those UK companies which have maintained or increased their dividends during the last two years are very unlikely to cut them now that the recovery has begun. We believe that a key theme for at least the next 12 months is that investors will become ‘yield hungry’. There are a number of larger UK companies which currently yield significantly more than 10 year gilts and we believe that these companies will undergo positive re-ratings. Their yields will gradually fall as share price appreciation delivers capital growth. Our favourites here are the integrated oils (BP, Royal Dutch Shell ‘B’), pharmaceuticals (AstraZeneca, GlaxoSmithKline), telecoms (Vodafone, Cable & Wireless) and utilities which all appear attractive on this basis, as do a number of companies from a variety of sectors such as RSA Group, Standard Life, British American Tobacco and British Aerospace.

2. Sterling Weakness and Overseas Stocks

Our view on sterling is that it is likely to be a weak currency for a sustained period of time. As well as having a very overseas -orientated UK portfolio, we have in addition allocated around 9% of the portfolio to overseas companies in sectors that are internationally priced and where there is a restricted number of UK companies that fulfil our requirements. This is a tactical rather than long-term strategic move. Our positive view on telecoms, pharmaceuticals and utilities has resulted in us adding to the portfolio some European stocks – KPN (yield 5.3%), Telefonica (yield 5.1%), Deutsche Telekom (yield 7.7%), Sanofi-Aventis (yield 3.9%), E.ON (yield 5.2%) and GDF Suez (7.25%) and the US Pharmaceutical Pfizer (yield 4.3%).

3. The ‘Nifty Fifty’

Assuming a very low growth environment in the UK and an anaemic recovery elsewhere, those UK companies which can deliver growth considerably in excess of the average will be re-rated in a return to the ‘Nifty-Fifty’ style of the 1960s and 1970s when the top 50 most popular large cap stocks led the market and rewarded a ‘buy and hold’ strategy. These companies will be able to deliver this superior growth because of their high geographic exposure to faster growing areas of the world, or because of the industry in which they are operating, or because of their superior technology, or management ability. We are balancing our high-yield portfolio with a number of companies which we believe will deliver superior growth. Companies in this category include Tesco, Wm Morrison, Reckitt Benckiser, Inmarsat, Healthcare Locums, Serco, Xchanging, Compass and Arm Holdings.

4. Consumer Staples

A particular sector we like globally as they benefit from a fast-growing global population. Their ‘global footprint’ makes them ideally placed to exploit the growing middle classes and their aspirations in emerging markets. In general they have underperformed the market rally as they are perceived as defensive. We believe they will be able to grow much faster than the corporate average in the future and will be in the forefront of the new ‘Nifty Fifty’. In the UK, we hold Unilever, Reckitt Benckiser, Diageo, British American Tobacco and Imperial Tobacco, whilst overseas we own Nestle, Johnson & Johnson, Procter & Gamble, Colgate Palmolive and Coca Cola.

What are your views on the global economy?

Unprecedented fiscal and monetary stimulus has allowed the world to recover from the financial crisis. The big question now is what happens when the stimulus is withdrawn. All the major deficit countries, such as the US and the UK, will have to reduce their budget deficits to retain the support of bond investors. However, with the private sector still de-leveraging, it is neither likely nor desirable that the recovery will be supported by increased private sector consumption. This would increase leverage and be a negative.

The traumas of the last three years were caused by global imbalances which allowed western consumers, particularly in the US and the UK, to become over-indebted. Global financial rebalancing is needed to sustain a durable recovery. Without this rebalancing, there will either be a prolonged global recession, a renewed bout of borrowing by an already over-indebted private sector, or ultimately unsustainable fiscal deficits. The big question is: how can this global re-balancing be achieved?

Given the impotency of the large deficit countries, attention will move to the high surplus nations such as China and other emerging and developing countries. These countries (particularly China) need to change their economic models, and they will need to change from targeting output to targeting growth. This can be done by focusing on growth in domestic demand rather than targeting growth in domestic supply. However, this change cannot occur whilst exchange rates in emerging economies are pegged at unrealistic levels to the US dollar.

If currency adjustments are not made, the results will be inflationary excess demand in surplus countries and deficit demand in deficit countries. These exchange rate changes are becoming essential to facilitate the global re-adjustment and ensure a durable global recovery. One consequence of this is that China will have to accept huge losses on its dollar asset portfolio. Even assuming that these currency adjustments are made, the global recovery still needs to be anaemic so that the adjustment is gradual and not disruptive.

Where does this leave the UK economy and stock market?

The UK is uniquely poorly positioned in the evolving economic landscape. Over the last 15 years, Britain has become disproportionately dependent on financial services, property speculation and consumer spending to fuel its £1.3 trillion economy. The UK will thus have a much bigger hangover from the credit boom than most other nations. Although the UK manufacturing sector is benefitting from the weakness of sterling and attracting orders from overseas markets, it comprises too small a share of the economy to pull the UK’s economy out of its slump on its own. What is more, as we have already pointed out, emerging economies need to change their economic model towards consumption and therefore traditional UK manufacturers may not benefit as much as expected.

Major policy errors by government and Bank of England have added to the UK’s problems. In essence, government and Bank of England inflation-targeting in the years leading up to the Credit Crunch allowed interest rates to remain too low for too long. The globalisation of the world economy with cheap products flooding in from emerging markets should have led to a major decline in inflation, but inflation-targeting allowed the Bank of England to achieve its inflation goal when every other economic indicator (house prices, consumption etc) was flashing red. This was the environment which fostered irresponsible behaviour by bankers, consumers and the government.

As Derek Scott, former economic adviser to Tony Blair, recently pointed out: “In an inappropriately low interest rate environment, investment spending is brought forward by households and businesses from tomorrow to today, so that when tomorrow arrives, budget constraints reduce spending at precisely the time when yesterday’s investment comes on stream, adding to supply.” The only way to keep things going is even lower interest rates, more Quantitative Easing, and even more government spending which, of course, brings forward even more ‘jam’ from tomorrow to today. So far, all the various fiscal and monetary measures have delivered stability and gentle recovery by bringing forward spending from tomorrow to today.

So you are not optimistic about the prospects for the UK?

The bond market in the UK will force the government to adopt a more prudent approach following the next election which is in May at the latest. It is time to face up to the fact that policy makers will have to tolerate a long period of very slow growth and high unemployment whilst the excesses of the past are worked out of the system in terms of both private and government consumption. In our view, Quantitative Easing should now be withdrawn. It has facilitated some re-financing of bank debt by large corporations, but only at the expense of an unnecessary rise in asset prices which increases the risk of inappropriate consumption by the private sector.

Cuts in the budget deficit need to be draconian both in terms of public spending and tax rises in order to persuade international investors to own sterling assets. The removal of Quantitative Easing and draconian fiscal action (huge tax rises) will be enough to keep growth at well below previous growth rates to allow for the long-term re-balancing that the economy needs. This will allow interest rates to stay at current very low levels for some time before eventually normalising as the anaemic recovery begins to build over the next few years. All the economic dynamics point to sterling being a weak currency for the foreseeable future. However, it is to be hoped that, if policy is appropriate then the downward adjustment of sterling can take place in an orderly fashion over a long period of time and not through a one-off precipitous fall of the pound against other major currencies.

Written by Jonathan Davis

January 11, 2010 at 11:16 PM

Bonds Are Boring Again

Here are some extracts (mildly edited in a couple of places) from a recent Q and A between Paul Read, co-manager of Invesco Perpetual’s popular and successful corporate bond funds, and IFAs. The basic message that comes out is that the corporate bond market has returned to normal. The outsize returns of the last 12 months from corporate bonds will not repeat, to the extent that equities may in many cases now offer better value. On the positive side, default rates are coming in well below the levels that doomsters feared at the height of the crisis last year. A good summary.

On gilts and inflation

“I think that quantitative easing has definitely had an effect. Gilt yields are lower than they would have been had we not had quantitative easing. It is one of a number of measures that governments have put in place over the last year to try to get the financial system working again. If quantitative easing did not exist, how high gilt yields would be is hard to say, but I am sure that they would be higher”.

“I think it is fair to say that the government and central bank agenda is, in a sense, inflationary. However, I also think that we are a long way from having an inflation problem of any kind. We have a big output gap; we have high and rising unemployment. I do not think that we are going to have a near‑term inflation problem and I would be surprised to see short‑term interest rates going significantly higher over the next 1.5 to two years. I think we are going to have low short‑term interest rates for quite a while and that is certainly what central banks in general have been saying”.

“Obviously, if interest rates go up it can have a negative impact on corporate bonds and bond markets generally, but what corporate bonds have been all about over the last 18 months is really credit risk and the spread contraction between the yield on the bond and the yield on the underlying government bond. Hence it has been much, much more about credit than it has about what is happening to the underlying gilt market”.

“We do not think that there is particularly good value in gilts and I suppose over time there is scope for gilt yields to rise. We have been running relatively short duration portfolios and a significant portion of our portfolios are under zero to four years in maturity. Absent some sort of nasty sell off in government bond markets, which I do not predict, I think we can work our way through this”.

On future returns

“There is always the potential for money to flow between asset classes and the relative attractiveness of equities in my opinion has increased so that, as you said before, at the beginning of this year I thought you had a once in a career opportunity in fixed income, fantastic yields that you were able to lock into, i.e. equity‑like returns from corporate bonds. From here, I think it is bond‑like returns, in essence, from the bond markets, so people wanting equity‑like returns may look towards the equity markets more”.

“I do not think there can be a strong rally in corporate bonds over the next year. This is not to say I think they will sell off, but I think we have had the big rally – depending on what part of the corporate bond markets you are looking at, up more than 20% so far this year, so we have had a significant rally that is not going to be repeated”.

“I think there are still lots of areas in my markets that are attractive, absolutely and relatively. I would include parts of high‑yield in that; I would also include parts of the bank subordinated debt markets, financials, that sort of thing. I think, in general, though, the answer is no, we are not going to have the same kind of rally”.

Are equities more attractive now?

“A lot of investment banks are publishing on the relative attractiveness of dividend yields versus the underlying corporate bond yield for the same credit. In many, many cases, you are starting to find very, very good blue chip companies which are paying dividends that exceed their corporate bond yields. In that sense, therefore, I would probably agree that there is a lot of value in a lot of the equity market, but you are taking a different kind of risk. Therefore, for people who want relatively safe income and lower levels of volatility, by moving into the equity market to achieve that you are probably exposing yourself to more volatility, so it is attractive, but it is a different asset class”.

Bank debt as an investment

“We are definitely still very involved in subordinated bank debt, bank capital. It is one of the parts of the fixed income market that I think has the most value still. We have big positions and significant sector weightings in banks and I continue to think that that is one of the most attractive parts of our markets. Although we have made fantastic returns on those parts of the markets, I continue to think it is attractive because I think that the risk involved in being in that sector has come down a huge amount over the past year and will continue to decline. Therefore, within investment‑grade credit I think it has a lot of value still”.

“The most significant value in credit markets continues to be in financials, so we continue to have significant positions in subordinated bank debt, both Tier 1 and lower and upper Tier 2. Outside of the banks, it is less obvious. There are parts of high-yield that continue to be interesting, such as parts of the insurance-company market and many of the very blue-chip, safe, household‑name, investment-grade credits that are trading more or less fully valued now. While it is not a market where everything is cheap, there are definitely areas of the market that are still very attractive”.

“In terms of sector-positioning, the big positions are in banks and other financials, which make up about 50% of the portfolio. This is not dramatically out-of-line with the market, because these are big components of the corporate bond market. About 25% of that is subordinated bank capital and about 15% is Tier 1. We still have big positions, then, in bank debt. Outside of the financial and insurance-company sectors, we have about 8% each in utilities and telecoms, but again they tend to be big sectors of the bond market. I do not think that we are taking big cyclical or other sector bets”.

Index-linked gilts

“Index-linked is not really attractive to us. It is not really a market that we are ever significantly involved in. It is an institutional market. I do not think that the breakevens in terms of inflation rates are interesting for us, but there are very important pools of capital that have to be involved in that market. We do not have to be involved in it and rarely are. It would have to be a combination of us having a really big worry about inflation and finding that the breakevens were attractive”.

“The way that we would normally manage that risk would simply be to have lower-duration portfolios and to build up cash, rather than to try to finesse it with index-linked. I do not think that it is a big part of the market for us”.

“What the last year has all been about, really, is credit risk, credit spreads, and ensuring that you capture that. That was where returns were going to come from. We have had quite a negative view of taking duration risk and have kept it relatively modest. The modified duration on the Corporate Bond Fund is about six [years]. It could be lower, but we are not taking significant duration risk, and neither would I want to be making that a core feature in the funds for the foreseeable future”.

Summing up

“The background is pretty good now: the markets are functioning; liquidity has improved; the market is technically well-supported; and, by and large, corporate management is focused on improving balance sheet and credit risk. What is much more important, I think, is managing people’s expectations and saying, ‘Please do not expect to get the returns that you got so far this year out of this asset class again – this is not going to happen’. There is still a huge demand globally for income, because short-term interest rates are low, as are gilt yields. The other traditional sources of income, like bank dividends, which were always considered to be relatively safe, are no longer there. This is, then, a good asset class in terms of income provision”.

Written by Jonathan Davis

October 28, 2009 at 2:06 PM

Q and A: Sebastian Lyon

Sebastian Lyon, the CEO of Troy Asset Management, is one of the coming talents in investment management. The firm he runs was recently given the mandate to run the Personal Assets Trust in Edinburgh, following the untimely death of Ian Rushbrook in October last year. Troy Asset Management started life with the task of running the family money of the late Lord Weinstock and other senior managers at GEC, from whom he inherited his conservative investment style and a focus on capital preservation.

Troy, which is named after Lord Weinstock’s famous racehorse, now runs three low cost unit trusts on an absolute return basis. The funds are aimed at investors whose primary objective is to preserve capital. This is something that the Trojan fund successfully achieved throughout the sharp bear markets of 2000-03 and 2007-09. Sebastian is one of a number of top-flight professional investors who offer me periodic snapshots on their view of the markets, and whose low cost funds I am happy to own and recommend.

Where are we now in the market cycle, in your view?

We have been in a secular bear market for equities since 2000. This is a long process of valuations being derated. That has been my view since the Trojan Fund was launched in 2001.  The bear market is likely to last 10 to 14 years.  Having had two down phases (2000-2003, the tech bust and 2007-2009, the credit bust), we are now well into the second half of that bear market, in my view. Having been very cautious, we can begin to be a little more optimistic on equity markets. There is a clear correlation between starting valuations and 10-year equity market performance.

The UK stock market, for example, has derated from a PE of 24x in 2000 to a PE of around 10 today.  Bear markets usually bottom on single figure PEs, so arguably there is one further derating to go before we can celebrate an enduring new bull market.  Now that the S&P and the FTSE have bounced off the 2002/3 lows in 2009, markets may have bottomed in nominal terms, but not when inflation is taken into account.

In a bear market equity income is the key to equity returns as it is clear that PE multiple expansion is not likely.  We have therefore concentrated on stocks that pay a high and sustainable income.  This served us in good stead during the credit crisis when financials, cyclicals and highly leveraged businesses have all been forced to cut their dividends. Investors in these sectors suffered permanent capital loss and the added insult, in many cases, of huge dilution as balance sheets have had to be repaired.

What have you been buying recently and why?

Nestlé: Over the past five years dividend growth has been 14%. The valuation (11 x earnings) is the lowest I have seen it in my career, so what you get is a top quality consumer staple at a very attractive entry point. The firm is globally diversified, operates in 130 countries, and has a highly conservative balance sheet (interest cover of 16x). The company is a proven innovator and has better top line growth than its peers over the past 10 years. Yet it is valued at no premium to them.  Should inflation return, fast moving consumer goods companies will be in a good position to pass on rising input prices.

BATs. Over the past five years dividend growth has been 16%.  The tobacco company offers material international diversification for a UK investor since its sterling earnings are minimal.  We believe the UK economy with struggle to grow for a number of years and quality defensive international exposure is underrated by investors. Such predictable cash generators are often ignored or seen as dull by the consensus.

Berkshire Hathaway. We have avoided financials stocks such as banks and life companies because of the opacity of their structure and exposure to bad debts/illiquid unmarketable securities. Berkshire Hathaway has not performed well this year. Strong balance sheets are not in favour for now. Pricing power in insurance and reinsurance remains very strong however. Berkshire’s other direct corporate investments are valued conservatively at book value.  It seems we are paying little if any premium for Mr Buffett’s investment abilities. We know investors go through periods of according different degrees of goodwill to Berkshire. At present we have a good margin of safety, with some healthy upside on a two to three year view.

Gold: In a world of currency compromise gold will retain its real value and protect real wealth for private investors. Still viewed with skepticism by mainstream investors, gold has risen in value every year this decade.  Although we have a small exposure to gold miners, we prefer holding bullion as miners are notorious in failing to create long term value for investors. The volatility of mining stocks is also much higher.  Gold is independent from the world financial system and supply is limited, not something that can be said about sterling and the dollar!  I view our gold holdings as being in lieu of holding cash.

What are you avoiding and why?

We do not own cyclical recovery stocks and financials for the reasons given above.  Banks will require more capital and the overhang created by the UK ‘nationalised’ banks (Royal Bank of Scotland, Lloyds Banking Group etc) has still to be unwound.  A number of UK domestic sectors, such as pub stocks and airlines, have been recapitalized, but I believe they have not yet raised enough money. Debt levels are far too high.

I am wary of corporate bonds. There is a consensus rush into corporate paper which makes me nervous. We need to be in real assets – equities, index linked and gold.  Bond spreads may look mouth- watering, but liquidity is very poor in the UK corporate bond market.  My concern is that lessons have not been learned from the dash for yield that occurred in 2004-07.  The truth is that were it not for quantitative easing (QE), government bond yields would be higher and corporate bond spreads consequently lower.

Any further thoughts on the markets?

Investors are more short term minded than they ever were. They are not, in my view thinking forward to the unintended consequences of fiscal and monetary policy. I think and hope that following the severe losses incurred in 2008, the obsession with relative performance in investment may now be seen for what it is – an absurd and imprudent way to manage private wealth. What is suitable for pension funds is not suitable for irreplaceable capital, whether that capital has been earned or inherited. There may still be one final lesson to be learned before we can say goodbye to this problem.

Written by Jonathan Davis

July 24, 2009 at 3:31 PM