Searching for safety in generalists

Do not ask an investment professional to talk about safe havens.

“You can have a sweet if you find the word ‘safe’ in any of our documentation,” says Alistair Hodgson, stockbroker with Pilings. “We would say ‘more secure’ or ‘less risky’.”

James de Sausmarez, head of investment trusts at Henderson Global Investors, says that there is no such thing as a safe haven outside of fixed interest. “Equity investing is by it’s nature risky,” he points out.

But the big cap companies that form the backbones of many of the big generalist investment trusts are at least medium risk, according to Hodgson. “A lot of these trusts which many have been very heavy into the banks will now be into things like mining and pharmaceuticals,” he says.

These type of 'steady Eddie' companies are the ones which managers and financial advisers expect to make the best returns in the difficult times that 2008 will almost certainly bring. A recent survey from the Association of Investment Companies found that IFAs are tipping resources including oil, blue chips and energy and utilities for next year. Fund managers are also tipping blue chips and resources.

“Generalist investment trusts have the advantage of the experienced manager doing the asset allocation for you, and they often hold bigger companies, which tend to be less volatile than smaller ones,” says de Sausmarez.

Anzelm Cydzik, investment trust liaison and development manager for Baillie Gifford, reckons that the diversification that some global generalist trusts offer could provide safer returns. Baillie Gifford in general has various holdings in resource companies to capitalise on growth in places like China and India, he points out.

“Brazilian oil company Petrobras, a large holding in the Monks Investment Trust, is a good example of a company feeding off that sort of demand,” he says.

There are also a couple of structural points that count in favour of safety in investment trusts. Large trusts like Baillie Gifford’s Monks and Scottish American Investment trusts have been around for over 100 years and the fact that they are not at the mercy of redemptions means that while adapting to particular markets, they also have a long term outlook.

“Another good thing about trusts as a type of investment,” says Hodgson, “is that they are such a broad church of views and management styles that you can always find something that you are looking for. I’ve always said to clients that if you don’t like what you’re holding just sell it and look for something you do like. In these times of extreme market circumstances you sometimes need a broad church of views to find what you’re looking for.”

Hodgson points to Personal Assets, run by by ex-Ivory and Sime manager Ian Rushbrook in an ultra-bearish fashion. The manager is now so wary of markets that he is holding mostly cash with a small exposure to the market negated by put options.

Another trust which allows investors access to a flight to safety in the form of cash is JPMorgan Elect, which comprises three share classes – growth, income and cash – which shareholders can elect to move into on a six monthly basis.

For the relatively safe haven of fixed interest de Sausmarez points to the Diversified Income trust launched in July 2007 by Henderson and managed by John Pattulo and Jenna Barnard. The trust will provide income by investing in a variety of fixed income assets including secured loans, asset-backed securities and corporate and high yield bonds.

“Fixed interest investment trust are not something you generally find because its not tax efficient to manage them in the UK, you don’t get the same tax benefits that you get with an open ended fund,” explains de Sausmarez.

1 January 2008