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A deeply polarised investment community

Saturday 13 October 2007 04:03PM

Take for example the extraordinary spectacle of my friend Ian Rushbrook, whose investment trust Personal Assets Trust has now gone the whole hog and moved into a state of 100% liquidity. The move is a logical enough culmination of his longstanding belief that the stock market is overvalued, but it is an extraordinary precedent nonetheless.

Has there ever been an investment fund before or since, outside the money market funds, that has in effect moved everything into cash, eliminating shareholders' exposure to the stock market entirely? The answer must surely be no. No other trust would have the rules (or a track record) that would make such a remarkable step a practical possibility.

Yet it is still not hard to find alternative views. At the Independent Investor conference last month, I would say that at least half the speakers were of a fundamentally bullish persuasion - that is to say, they thought that the stock market could (and probably would) go higher, despite all the anxieties in the banking world about the potential impact of the looming credit crunch.

Bill Mott, who  has recently returned to full-time fund management at the small boutique firm Psigma Invesment Management, has been buying the shares of UK banks all summer. That didn't include Northern Rock, but pictures of depositors queueing round the block to get their money out of the stricken mortgage lender - the first genuine bank run in the UK in living memory - could not, says Bill, have provided a better backdrip for a contrarian stock market investor.

As a result he has 25% of his fund in bank shares, a significant overweight relative to the market. He first started buying bank shares because they were part of another investment theme that excites him, namely the notion that this is the time to start buying larger company shares. 

The more the credit crisis has deepened, the keener he has become on his bank share positions, on the basis that their appeal on one ground is now being supplemented by another - namely, a hysterical market reaction against anyone involved, however tangentially, in the credit squeeze.

This positive stance has, by and large, been vindicated since, with the equity market recovering strongly and bank shares evetnaully following in their wake. Some well-judged buying, led by Philip Richards of RAB Capital, has even breathed life back into Northern Rock itself. 

My experience has been that those directly or closely involved in the banking world have been far more worried about the impact of the credit crisis than experienced investors outside the banking community. On the face of it this points to the need for caution, until you realise that it is bankers who have most to lose from a severe credit contraction - and who are most likely, therefore, to let their emotions dominate their thinking.

Or to put it another way,it is clear that there is a crisis of confidence in banking that will have its own long term effects, unless reversed, but to say that the markets must therefore follow the banker's lead is not a necessary or logical conclusion. Those at the eye of the storm are often, however well-informed, in the worst place to arrive at a measured judgment about what comes next.

Another experienced value investor of my acquaintance says that while banking shares are probably cheap, the problem is not knowing which ones have real problems and which ones do not. The thrid wuarter reporting season has shown for example which banks have done well (eg Goldman Sachs) and which ones (eg Citibank, Deutsche Bank) have not.

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