Despite what investors have already suffered this year, we still face a very bumpy stock market ride, a chastened Jeremy Tigue says. He admits he underestimated the pressure on banks and insurance companies not to buy shares this year but still hopes for an upturn by Christmas.
Mr Tigue runs Foreign & Colonial Investment Trust (FCIT), which started the investment trust movement 134 years ago to enable "people of modest means" to participate in the stock market and is now the biggest of its breed. His role means Mr Tigue bears not only the weight of history but the responsibility for continuing an impressive performance stretching back at least to the end of the Second World War.
In the past year he has fought a remarkable rearguard action: while the FTSE 100 index has fallen more than 40 per cent, FCIT is only 25 per cent off its year's high. As a long-standing FCIT shareholder, I believe that is a creditable achievement, especially for a fund worth pounds 2bn which is difficult to turn round quickly and is bound to hold a good chunk of blue chips in a portfolio spanning 500 companies in 30 countries.
Mr Tigue admits he was over-optimistic about market ability to recover from the shock of 11 September. He says: "My mistake was to assume the boost to liquidity by the central banks in the wake of those attacks would work its way through the system. It didn't. We thought there would be a global economic recovery, but that Japan would remain mixed this year. So it has, but there have been acute problems elsewhere. I think the market indices will go all over the place, so we are trying to find the individual companies that will do well.
"The key thing that has made FCIT successful has been continuous adjustment to changing market conditions. Most importantly in the present climate, it's very unlikely that FCIT will run out of money, but a lot of institutions have been forced sellers. I feel very strongly that we have to run FCIT so it is never in the situation where we cannot invest because we have run out of money and the banks won't lend us any more. That is what has happened to the split- capital investment trusts, and it is the worst thing that could happen to any investment trust. We are making sure we have enough bank facilities in place to invest if the market falls another 25 per cent."
But having the money in the locker is one thing: it is quite another to make sure that money is invested wisely. Mr Tigue, who inherited his basic approach from his legendary predecessor, Michael Hart, uses a classic "top-down" method to allocate resources, then identify promising shares.
He says: "Our investment process is based on geographical teams, not global sector themes. We have a UK desk, a US desk, an Asia desk, a European desk and various emerging markets desks. They are buying and selling stocks, and each of their performances is judged against a benchmark. In terms of constructing an overall portfolio, those individual teams are feeding into a monthly process of asset allocation. Each team produces a monthly report about each equity market and they have a checklist: valuations, political situation, supply of and demand for equities, market sentiment. We try to score each of these elements, so we end up with a score for each market, and they each make a forecast for equity return over the next 12 months. The problem is to get that done on a consistent basis, because some teams are more optimistic than others, but we allow for that.
"Once a month, on a Monday, we have a discussion with all senior fund managers, and people from our …