It cannot be the happiest prospect. Going to your AGM, meeting the board members of the investment trust you manage and telling them that you’ve lost a quarter of their money.
I talked to Alex Crooke of Bankers Investment Trust soon after the end of its annual meeting. Had he been hauled over the coals? Was it a chastening experience?
Far from it. Crooke was in relatively upbeat mood, although he is not about to plough the trust’s cash reserves back into the market just yet. Yes, the share price is down 25% over the past year, but the typical global growth fund is down 34% and so is the FTSE All-Share. These are wondrous days when you can lose 25% and remain top quartile.
“I’m getting less bearish by the day,” says Crooke bravely, as the FTSE slips below 4,000. He says there was a fair bit of optimism around Christmas time that there would be a second-half recovery in 2009. Now that confidence has evaporated again, it makes him, a committed contrarian, more comfortable about the outlook.
His view is that markets are already discounting poor corporate fundamentals and a very bad recession, so valuations now are quite realistic. “Share prices have not risen in line with corporate earnings over the last five years and, following the big fall in share prices, valuation ratings today are at a level not seen by investors for a generation.
“In our view this reflects both a gloomy outlook and the high level of redemptions from traditional and hedge fund investors. Confidence levels are equally depressed, and just as it was hard to find a bearish analyst two years ago, it is hard to find an optimistic one today.”
So does this analysis suggest to Crooke that he be rather more adventurous than his peers? Not quite. For now, at least, he is sticking with high-quality, low-debt stocks until there is more clarity about the direction of markets.
“Rather than trying to call the turn, I’d rather pay up-front for quality,” he says. “It might be a bit expensive against the rest of the market, but I’m happy with that.”
Like most fund managers, Crooke was caught out by the severity of the credit crisis. “We felt the system was stressed, but we did not think it was going to be this bad. But we got some things right. For example, we didn’t hold any miners.”
He was also relatively low in financials, his major holding being HSBC. He also took advantage of RBS’s multiple embarrassments by buying part of its Bank of China stake at HK$178 (£16), which is now trading at over HK$210.
But overall the fund is 18% invested in financials largely down to a decision to overweight life insurers plus some general insurers. To date, it has not proved the best of decisions. Although he did not hold L&G, which has crashed in recent months, he does hold Aviva and Prudential. Another large holding is Catlin Group, a Lloyd’s general insurer that he hopes will benefit from the fall in capacity following the collapse of AIG.
Oil and gas also feature heavily in Bankers’ £380m portfolio. BP is its biggest single holding (4.1% of the fund); 2% is in Shell, 1.8% in Petrobras and 1.6% in BG Group.
“I’ve been in and out of oil and gas,” says Crooke. “I sold down during June last year when the oil price was at unsustainable levels, but I have started raising my holdings again in the last three months. Over the longer term the world will be struggling to find sufficient oil to meet our needs.”
The trust has a net cash level of about 4%, a defensive position compared with its normal gearing level of 10-12%. Other managers may think there is value to be found in the most bombed-out parts of the market such as property and retail, but Crooke is not so sure. “Those countries with the most overvalued property markets have suffered the most. Sterling’s recent weakness should help the UK economy in due course, but the high levels of consumer debt and heavy reliance on the financial services sector may lead to a sharp slowdown that could take some time to recover. Savings rates need to rise and levels of debt to fall, which will not be easy to establish when unemployment is rising sharply.”
But although he reckons Britain and continental Europe lag America by 6-12 months, Crooke says that a global trust such as Bankers should not be overweight in dollar assets right now. He says that the dollar may be seriously over-valued, given the challenges facing the American economy.
“The US economy faces huge challenges, which make the recent rapid appreciation of the US dollar and the appetite for US government debt somewhat perverse,” he says.
Much of the dollar’s appreciation is down to the repatriation of American investors’ assets from overseas markets because the dollar is regarded a safe haven in troubled times. But if the perception of risk changes and we become less concerned about a possible “great depression”, the dollar could soon weaken. So if Britain and Europe are lagging America, and America is not exactly attractive, then where is?
Crooke says the opportunities lie in Asia. No one talks decoupling theory any longer. It is evident that America has exported its recession across the globe. So when the US recovery begins, the stocks that may benefit most could be the Asian exporters. “You need the US to recover, but we would rather be buying Asian stocks that will feed off that recovery than US stocks.”
But we still need to identify if and when that elusive American recovery begins. What might be the catalyst that gets us moving foward again?
Crooke reckons it’s down to the American housing market. It was the subprime crisis and the steep fall in American house prices that led us into the recession. When house prices stop falling, it could be a very strong “buy” signal for the equity market. The trillions of dollars of toxic assets that have been written down so heavily might just start to be revalued, and the banking system may start to stabilise.
Didn’t we all think globalisation meant that America could slow and the rest of the world could still steam ahead? The truth is that it’s still down to the folks in Peoria, Illinois.