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David Kimberley
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Updated 09 Feb 2024
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This is not substantive investment research or a research recommendation, as it does not constitute substantive research or analysis. This material should be considered as general market commentary.

“I have never been able to predict interest rates,” Warren Buffett told an interviewer in 2020. “I've never tried, I don't try.”

Given that you can hardly open a news publication or watch a manager update at the moment without some sort of interest rate forecast being made or asked for, you could be forgiven for thinking Buffett was the only one who doesn’t bother making them.

So it was refreshing to watch a recent interview with Paul Mills, one of the managers who contributes to the Alliance Trust (ATST) portfolio, openly saying it’s impossible to know if there will be cuts.

It’s worth keeping that in mind at the moment, the base case for many investors seems to be that rate hikes are done, cuts are on the way and we’re headed for a soft landing with no major problems on the horizon. That may be the case but it’s far from a guarantee, particularly given the huge level of economic uncertainty that exists today, a topic covered by one of my colleagues earlier this month.

But accepting that we simply don’t know also has the potential to make life easier. Rather than attempting to game valuations based on what central banks do, you can invest in trusts that are more immune from the rigours of monetary policy.

ATST is arguably one example of this and the fact the trust has had such a strong couple of years suggests its approach of investing in a group of managers’ top stock picks is a wiser approach than focusing on macroeconomics.

Another potential trust to look at, for somewhat similar reasons, is BlackRock Smaller Companies (BRSC). The managers of the UK small cap-focused trust look for companies with strong cash flows and balance sheets. The result of this is that many firms in the portfolio have little or no debt and continue to generate lots of excess cash because of their superior margins.

Smaller companies have been hit harder by rate hikes and BRSC has suffered over the last 18 months as a result, although performance has picked up again since the final quarter of 2023. There seems to be a sense that they will struggle more in an economic downturn and find it harder to access debt. This is not necessarily wrong but the BRSC strategy could mitigate those problems. If you don’t have debt and operate with good margins, then you are may be far less impacted by those risks.

Ultimately a lot of forecasting appears to stem from a desire to either generate clickable headlines or provide a sort of catharsis. In a world full of uncertainty, it is comforting to have the impression that someone knows what is going to happen. But we think taking the alternative approach and just accepting there are things you don’t know, can make for an effective approach to taking on risk.

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