Investment specialist recommend long-term investment in recession-resistant company for decade
Each month, we grill a senior fund manager, asking them tough questions about where they'd invest for the next year and beyond, as well as what pitfalls to avoid. In this installment, we spoke to Darius McDermott, investment manager at VT Chelsea Managed Funds.
If you could invest in only one company for the next ten years, what would it be?
I'd opt for Primary Health Properties Plc (PHP). It owns general practice surgeries that are guaranteed by the NHS, making it completely recession-proof with a yield of over 7%. While Assura Plc was my initial pick, it was recently bought by private equity giants KKR and StonePeak.
What about for the next 12 months?
For the short term, I'd recommend SDCL Energy Efficiency Trust (SEIT). It's trading at a 49% discount and offers a yield of almost 14%. Despite being lumped in with renewable energy, two of SEIT's biggest investments are in US steel-making and manufacturing, sectors receiving strong backing from the current US administration. If it can offload more assets, it's likely the market won't be able to ignore how cheap it is.
Which sector do you think people should be most excited about?
Renewable infrastructure investment trusts and defense. Renewable infrastructure trusts have been hammered by the market but offer huge yields with reliable dividends backed by government-guaranteed cash flows. In our opinion, their share prices are too cheap. For defense, given the fundamental shift in international relations, we only see defense spending going one way over the next few years.
Which sector would you be avoiding?
China. It's now a major strategic rival, becoming a world leader in manufacturing and various technologies. This has led to the imposition of harsh tariffs. China's ambitions over Taiwan also heighten the investment risk for foreign investors, who could end up as collateral damage in geopolitical tensions. We're also cautious on pharmaceuticals, with tariffs set to be introduced on this sector.
Is the UK market good value for money?
Especially small companies. Years of capital flight have left many UK stocks trading at bargain valuations. Over most long-term timeframes, history shows small caps outperform large caps. A succession of headwinds — Brexit, Covid, rising inflation, and constant technical selling — has left high-quality companies in the UK small cap space looking like great value.
How are you positioning your funds to cope with the market turmoil?
We've been increasing our exposure to alternative investment trusts and becoming more cautious on equity markets, particularly US equity markets. We've also stayed wary of low credit spreads in the bond market, which fail to compensate for current risks.
Will Trump's tariffs be a short-term blip or have a more lasting impact on markets?
The impact could be lasting, as uncertainty around tariffs drags on and impacts confidence. This will eventually feed through to the real economy. That being said, it's hard to predict Trump and his policy changes.
Are the US glory days behind us?
I wouldn't write off the US. Tariffs will affect Europe and China, particularly export-oriented economies, more than the US. The US is still home to many of the world's best companies like leaders in AI. A weaker dollar would also boost earnings for US multinationals.
Nvidia – do you think it will ultimately boom or bust?
We still like Nvidia. AI potential is being massively underestimated by the market and the general public. Companies and states are locked in an arms race to achieve Artificial Superintelligence, and they will pay any amount to get there. Nvidia's chips are essential to this effort, and demand for computing power is only going to keep rising.
Should investors focus on growth or value stocks?
Both. While it's trendy to focus on one style, it increases volatility. It's always wise to maintain a balance between growth and value.
What about active or passive investing?
Neither approach should be dogmatically followed. There are great active managers who genuinely add value, but you must be selective. Several trends have recently shifted in favor of active management, such as more competitive fees and the increasing inefficiency of passive indices.
Why should investors choose your funds over cheaper passive alternatives?
Our ability to avoid doing very stupid things. Passive funds have no choice but to buy whatever the index dictates, leading to buying long-term government bonds with zero or even negative yields, many of which have since lost half their value. We welcome passive investors, as they are forced buyers and sellers, creating opportunities for us.
Is the property market 'safe as houses' or due for a crash?
UK house prices have been artificially inflated by governments for decades, primarily due to an artificial supply shortage and high immigration rates. However, post-Covid, higher inflation and rising wage inflation have helped correct this. While house prices are still overvalued, a crash is unlikely unless there's a massive uptick in unemployment.
Should gold form part of everyone's portfolio?
Yes, gold always has a place in a portfolio. It serves as a proven store of value and a useful hedge against a collapse in the global financial system. Confidence in currencies and central banks may be waning, making gold a reliable safe haven.
What about Bitcoin?
Crypto has potential, though it's a complex topic on its own. While we don't like Bitcoin specifically, a collapse in confidence in central banks and fiat currencies could drive the demand for crypto such as Bitcoin.
What do you consider the biggest geopolitical threat to global stock markets this year?
The ongoing geopolitical tensions between the US and China. The unipolar era of US dominance has ended, leading to a less stable world with a greater potential for conflict. Always remember that in times of uncertainty, states prioritize security over prosperity.
You inherit £100k tomorrow. Where would you invest the money?
It depends on your age and personal circumstances, but if you had a time horizon of 20 years or more, I'd invest it in global equities and leave it untouched. Let the market work its magic.
What's your greatest ever investment?
Doric Nimrod Air Two, an aircraft leasing investment trust that owned a fleet of Airbus A380s leased to Emirates. We added to our position during Covid and made around 600% when the world realized these aircrafts would be needed again.
What's your greatest ever investing mistake?
At the end of 2022, when it became clear that inflation was sticky and interest rates were headed higher, we had too much growth exposure. While we reduced our growth positions somewhat, we should've sold a lot more. Growth went on to underperform significantly over the next 18 months.
Darius McDermott, investment manager at VT Chelsea Managed Funds, recently agreed that if he could invest in only one company for the next ten years, it would be Primary Health Properties Plc (PHP). For the next 12 months, he recommended SDCL Energy Efficiency Trust (SEIT). Despite China being a major sector to avoid due to geopolitical tensions and tariffs, he believes the UK market, especially small companies, offer great value for money. To cope with market turmoil, funds are positioning themselves by increasing exposure to alternative investment trusts and becoming more cautious on equity markets, particularly US equity markets. Gold always has a place in a portfolio, serving as a proven store of value and a useful hedge against a collapse in the global financial system. The ongoing geopolitical tensions between the US and China are considered the biggest geopolitical threat to global stock markets this year. If someone inherits £100k tomorrow, Darius suggests investing it in global equities and leaving it untouched for a time horizon of 20 years or more. His greatest ever investment was Doric Nimrod Air Two, an aircraft leasing investment trust that owned a fleet of Airbus A380s leased to Emirates. Despite making around 600% when the world realized these aircrafts would be needed again, Darius also admits that at the end of 2022, he made a big mistake by having too much growth exposure.
