Money: Defy the prophets of doom

Crash or no crash, you shouldn't take flight from the stock market

NOBODY seems to have a good word to say about the stock market at the moment. Despite the fact that the FT-SE is still booming, the doom- mongers are in top form. Some of them are even looking forward to the drop: "We're keen to see the market fall - it's healthy," says Alan Kerr, a fund manager at Murray Johnstone.

But the truth is that ordinary investors have got as much idea about the future as the highly paid City experts. Markets do move up and down in cycles but no two cycles are identical and much of the clever analysis is done after the event. There is no way to tell when any big crash might come.

One clue (if you go for this sort of thing) is that both great crashes this century, 1929 and 1987, happened in October.

The October 1987 crash "came out of nowhere", says Mark Dampier, investment director at Churchill Investments. And we will probably have no more warning if there is a crash in 1998. He says: "Investors have to allow that they won't be able to remove their money at the very top of the market unless they have seen next year's Financial Times."

If there is a major market "correction", or even a crash, do not rush to sell up and get out. If you have money invested in collective funds (unit and investment trusts and the new European-style funds, OEICs) then the stock market will have to drop by at least 20 per cent to make it worth while for you to sell your investments and buy them back at a cheaper price.

Most of us will do better to pick our investments carefully and then leave the money invested for many years - come what may on the stock market. Look for a fund that you can invest in and forget about, because its managers will make the most of market conditions. For example, there are several funds that can recession-proof their investments by converting some of their shareholdings into money or bonds. They can go back into shares when prices are cheap but recovery seems on the way.

You will have to search out these funds. Most conventional unit and investment trusts do not do this. They remain almost fully invested in equities, even when markets are dropping. "A typical defensive measure is to go 10-15 per cent into cash. They rarely do more than this because there is a view that people want to be in equities," says Mike Webb, deputy chief executive of Invesco. The fact that most collective funds have nearly all their money invested in shares, even when times are bad, may come as news to people who have the perception that an actively managed fund is always better than a passive tracker fund in a falling market. One of the commonly voiced objections to trackers, which simply follow a market index such as the All-Share, is that the manager is a computer that cannot sell shares and use the money raised to "go liquid" (meaning they hold on to the money).

If you have a tracker PEP and want to leave your money in a tracker fund through any recession, you will take the full hit of any market falls because the manager cannot sell any shares at all.

But in the long term, what goes down should go up again. If you are investing on a monthly basis (rather than through lump sums) you can at least benefit from buying some shares at low prices when times are hard.

For those looking for new places to invest, there are several collective funds that give their managers the chance to sell shares and hold assets in bonds or cash. The GT International Growth Fund, now owned by Invesco, has almost 40 per cent of its assets in government bonds and 11 per cent in cash.

Mr Webb says: "Our view is that if there is a recession it will be from deflationary pressure rather than inflation. Deflation is very good for the bond market, so we won't sell up. Zero and negative inflation makes the yield on bonds look good. Overall, yields will fall but the bonds are much more valuable."

The GT fund does not get much press because it is in the international growth sector. As it is not fully invested in shares, the returns have been less than spectacular compared with its peers. But if you are looking for a steady investment, it is worth considering. Growth over the past year (to 20 July, net income reinvested) has been 12.26 per cent.

There is a good argument to "go global" during a recession on the grounds that economies around the world move at different speeds. Mr Dampier likes several international general investment trusts that do not get much publicity but produce excellent long-term returns and give the managers a free hand to invest where they want, as well as buying bonds and holding some assets as cash. And they are all cheap, because investment trusts have much lower charges than unit trusts.

Mr Dampier runs a "Lazy Man's Portfolio" for investors who want a wide global spread of shares without the need to check on their progress more than once a year. One of the funds in the portfolio is the RIT Capital Partners Fund, managed by Nils Taube. Little-known

outside the investment world, Mr Taube runs several successful funds and is credited with getting out of the market before the 1987 crash. The Partners investment trust is trading at a 14 per cent discount, making it a cheap buy. The fund is around 30 per cent invested in money and fixed- interest investments.

Other lesser-known names that invest globally include the Alliance Trusts, one of the old-established Scottish investment trust houses. Alan Young, Alliance's investment manager, says that having a long history can help the company take a balanced view. "A lot of what's going on now is a lot like what happened in the 1890s," he says. The Alliance Trust has about 5 per cent of its assets in cash but has not yet opted for bond investment. "Having a global investment spread is useful. Europe may not be immune to the Asian problems but it is at least, hopefully, coming out of its own domestically induced dull phase. We have great flexibility in where we can go to invest."

If you are happy to take more risk, there are some cash-heavy funds that use their money during a recession to take advantage of the chance to buy cheap assets. In the early Nineties, Foreign & Colonial's Enterprise Fund had large cash holdings that it used to buy struggling unquoted businesses "When times are hard, cash is king," says James Nelson, the fund's manager. "We were in a position where we had the capital to build a portfolio. When the stock market is strong we can sell those companies easily and get good value. At the moment we have market liquidity and should there be a setback in the economy we are ideally placed to put that liquidity to work."

There is some good news for those who prefer to invest their money in the familiar world of UK blue-chip shares. Richard Hughes, M&G's vice chairman, believes that many of the top names are relatively recession- proof. "We have two funds, UK Growth and the Blue Chip Fund that are quite well invested in recession-proof stocks. This includes pharmaceuticals and telecoms and indeed any shares that are not affected by the industrial cycle. And possibly Marks & Spencer, although the edge may come off that type of large blue chip."

For those who are too cautious to go into the stock market, or who want to hold a wide range of investments, corporate bond funds will usually perform well in a low interest rate and low-inflation economy. If you have not chosen a general PEP for the 1998/9 tax year, a corporate bond fund will lock you into a decent rate of tax-free income. Many corporate bond funds are giving returns of about 7 per cent a year. Mr Dampier likes Aberdeen Prolific and Commercial Union's offerings. A word of warning - if you are influenced by the bearish madness infecting the stock market, beware of removing your money and then refusing (or forgetting) to reinvest it in shares. Figures from Mercury Asset Management show that returns from the US stock market averaged 17.6 per cent a year for the Eighties as a whole. Investors who missed out on the best 20 days over the decade made total returns of just 9.4 per cent a year.

q Contacts: Aberdeen Prolific, 0800 833580; AITC (factsheets on investment trusts), 0171 431 5222; Alliance Trusts, 01382 201900; Churchill Investments, 0193 844444; Commercial Union, 0181 686 9818; Foreign & Colonial, 0181 880 8120 - www.fandc.co.uk; Invesco GT, 0500 303321; M&G, 0345 321008; RIT Capital Partners, 0171 493 8111.