You can shelter from a storm but not a tsunami, in the same way as you can shelter from a recession but not from inflation, according to Simon Evan-Cook, manager of the recently launched Downing Fox multi-asset range, who said that, faced with a tsunami of rising prices, investors can only run away and try to get to higher ground with one asset class: equities.
Aware that by saying this he’s “going against received wisdom in the industry”, Evan-Cook is confident in his approach, as it is how the wealthiest families in Britain manage their wealth.
“Take the Duke of Westminster, for example. He is still one of the richest people in the country because he owns assets that are very high quality and that people want,” he said.
Even if inflation spikes, or if there is a war, people will still want high-quality assets such as “property in the middle of London”, he said. “It’s going to take a lot to destroy that value. Whereas if you hold it in cash, you get swept away.”
But it’s not easy to invest like this, as it requires going over the short-term volatility, which is very hard for people to do, because it means they will have to face big drops of perhaps 30% or 40% followed by 60% rises. It’s a real “dilemma” for the defensive investor who has to look through the short and embrace the long term, said Evan-Cook.
Hiding from inflation in cash and bonds poses “a serious risk” of getting value wiped away, explained the manager, but that doesn’t mean cash and bonds have no place in a portfolio.
“You can shelter from a recessionary storm by hiding in cash, finding a bond to keep yourself dry and come out when the clouds are gone. But you don’t want to hide in a shelter in the event of an inflationary tsunami. Your best bet is to run away and try to get to higher ground,” he said.
“This is the irony of me holding cash and bonds, and that’s because they are the best thing for diluting short-term equity volatility. But if your mindset is over five, 10, 20 years, you'd be much better off putting as much as you can possibly bear into equities.”
By holding equities investors have a better chance to outweigh inflation by holding the companies that are raising their prices, he argued.
“When you look around at how much you're paying for coffees, clothes or anything else now, most companies are keeping pace. So even if you don't beat inflation, you are getting closer to actually outrunning it,” Evan-Cook said.
Admittedly, equities will be very volatile in the short term, but even defensive investors will find it worth it, he noted. To overcome their fear for the short term, he invited them to consider that inflation probably won't stay at 7%, and may drop to 5% or even lower in the long run.
“But if you just sit in cash earning 3% for the next 10 years, you're losing money even more quickly than in the past decade,” he said.
“You are not becoming more wealthy by holding cash. If you can stretch your time horizon to five to 10 years, you'll see that the short-term volatility of equities tends to equal itself out because the upward swings can be huge.
“In five to 10 years, the annualised returns for equities will end up making them the most defensive asset. I'm pretty confident about that,” he concluded.