Ruminating on Recovery

10/23/2008 12:01 am EST


Andrew McHattie

Editor, Investment Trust Newsletter

Andrew McHattie, editor of Investment Trust Newsletter, is seeking likely sectors to gain when world markets recover.

Following Lehman Bros.’ bankruptcy, the subsequent shocks to the system and widespread bank failures have had a profound impact on the value of assets worldwide. Investment trusts have not been exempt, and many have fallen sharply in value.

Amongst the worst are the Lewis Charles Romania Property Fund (LSE: LCSR), European Equity Tranche Income (LSE: EET), Vietnam Opportunity Fund (LSE: VOF), RAB Special Situations (LSE: RSS), JPMorgan Russian Securities (LSE: JRS), Close European Accelerated Fund (LSE: CEAF), Eastern European Trust (LSE: EST), and BlackRock World Mining Trust (LSE: BRWM).

Investors have fled from risky assets, most notably from financials, emerging markets, and commodities. Their search for safe havens in the equity markets has largely been fruitless.

Anything we write today may well be out of date by tomorrow, but at this time of crisis we do think it is worth listening to some experienced investors who have been through tough times before.

As reported in Financial Times, Anthony Bolton, president, investment, at Fidelity International, believes equity markets are cheap. He said the elements are in place for a recovery. He explains: “When consumer sentiment is very negative, you want to buy it. I would say shares are as cheap as I’ve seen them in my lifetime of managing money, in some sectors—especially consumer cyclicals, such as general retail and media. There’s quite a bit in those prices already discounting recession—more than in previous cycles.”

Also, Bruce Stout, the manager of Murray International (LSE: MYI), has been (rightly) pessimistic for some time. He moved the trust partly into bonds and cash around 12 to18 months ago, and in the global growth and income sector, the trust has fared comparatively well as a result. He has been cautious on financials for a long time, and has not held any banks.

He says now that many good companies are coming down with the bad, so the trust is starting to put a little money to work in Europe and in Asia in selected financials—with strong balance sheets, strong franchises, and strong deposit bases. He is still steering clear of commodities and consumer cyclicals. Bruce says that more value is now being uncovered in industrials and thinks it is reasonable to “stay cautious, but to look for opportunities.”

Long-term investors may indeed take some heart from these comments (and from Warren Buffett’s recent comments that he’s buying stocks again—Editor), although the financial crisis has moved up a level since these opinions were given. Over the past few weeks we have met a lot of investment trust managers though, and for the vast majority of them it is business as usual.

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