The best investment strategy looks nothing like gambling

One of the more exasperating myths about investing is that it is just another form of gambling. This is a useful belief if you are looking for reasons to justify hiding in cash. But it is wrong. The best investors are the opposite of gamblers. They are seeking to manage the only risk that really matters - permanent loss of capital.

I was reminded of this when reading the latest quarterly report from Personal Assets Trust (PAT), an investment company that neatly summarises its purpose as follows: ‘to protect and increase (in that order) the value of shareholders’ funds per share over the long term.’

There is a lot packed into that short sentence. The preference for capital preservation over growth. The focus on not diluting existing shareholders’ assets. The lack of interest in short term gains or losses.

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I’m not a PAT shareholder. But 17 years into the post-financial-crisis bull market, and with two giant uncertainties hanging over markets - AI and oil-fuelled inflation - I wonder whether I should be.

For an investment trust that prides itself on protecting capital first and growing it second, Personal Assets Trust (PAT) has an unexpectedly concentrated portfolio. Its £1.7bn of capital was divided at the end of June between gold (8%), just 18 carefully chosen shares (37%), various types of bonds (54%) and a small amount of cash.

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If you are going to invest in fewer than 20 stocks, you want to be confident about your choices. You do not want to be placing a bet on a binary outcome. You want to sleep at night.

In the latest quarterly report, PAT’s managers reference two recent purchases, neither of which I knew anything about and both of which exemplify this safety-first investment approach.

The first is Canadian National, a North American railway operator, with a long list of competitive advantages. It resembles Burlington Northern Santa Fe, a very similar company in the US that Warren Buffett acquired a decade and a half ago, for very similar reasons. CN is a bet that, even in an AI-enabled, digital world, we will continue to need to move large amounts of physical stuff around.

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Canadian National benefits whether that stuff is grain or timber or cars or energy products or consumer goods. It is supremely well-diversified. It has pricing power because it is one of just six major railroads running across the North American continent, which co-exist, not compete, as effective local monopolies. And, in a world with a higher for longer oil price, it is competitive versus road transport.

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The second company is another picks and shovels business and, most likely, a company you have never heard of. Hubbell makes small but essential pieces of electrical equipment for the transmission and distribution of electricity across the US grid. It makes cable connectors, lightning arresters and insulators. These are small bits of kit that might cost no more than a few pounds but can help avoid millions of pounds worth of damage. For that reason, Hubbell’s customers don’t really care, within reason, how much they cost. They are mission critical and a small part of the cost of a power line. A great combination.

What makes Hubbell even more interesting as an investment is that it has a strong position in a market that is almost certain to keep growing for years, if not decades, to come. According to PAT, the International Energy Agency estimates that the global electricity grid needs to more than double in size over the next 25 years, with electricity growing from 20% of global energy consumption to 50% by 2050. PAT bought its stake last year for a very reasonable 20 times earnings.

The point of similarity between these two investments is not that they are boring, old economy companies, although they are. The link between the two is that they can deliver sustainable, inflation-resistant and growing returns more or less whatever happens technologically or geo-politically. It is a characteristic that is shared by Personal Assets’ second biggest equity holding, Alphabet, despite it being neither old economy nor boring.

Alphabet is a bet on a positive outcome for the AI revolution, but it has many different ways in which it can win in that scenario. It owns the world’s leading search engine, a cash generative and growing business. It has one of the world’s leading large language models. It is making its own custom silicon chips. It runs one of the world’s leading cloud operations. If you are looking to remain exposed to the AI story while protecting the gains you’ve already made from riding the AI wave, Alphabet is precisely the kind of stock you might want in your portfolio.

The presence of Alphabet alongside Canadian National and Hubbell illustrates the fact that managing risk is not the same thing as minimising it. The trick when it comes to protecting and growing capital (in that order, remember) is knowing which risks to take and when.

One of the key characteristics that Personal Assets Trust shares with all of our own portfolios is the ability to flex the weighting of those carefully chosen equities within the trust’s overall asset allocation. At the moment, shares represent less than 40% of the total, although that is 10 percentage points more than 18 months ago.

In the darkest days of the financial crisis, the equity weighting rose from around 40% to 70%. During the Covid market crash, it went from 35% to 45%. As shares plunged in the wake of the Liberation Day tariffs, the proportion increased from 30% to 40%. Crucially, those increases in risk appetite took place when it felt deeply uncomfortable to implement them.

So, managing risk is not the same as avoiding, or even reducing, it. Protecting and growing capital is about knowing what is appropriate and when. Pretty much the exact opposite of gambling, in fact.

This article was originally published in The Telegraph.

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Important information - investors should note that the views expressed may no longer be current and may have already been acted upon. Overseas investments will be affected by movements in currency exchange rates. There is a risk that the issuers of bonds may not be able to repay the money they have borrowed or make interest payments. When interest rates rise, bonds may fall in value. Rising interest rates may cause the value of your investment to fall. Reference to specific securities should not be construed as a recommendation to buy or sell these securities and is included for the purposes of illustration only. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to one of Fidelity’s advisers or an authorised financial adviser of your choice.