The Long Term Is Getting Shorter
Skerritts View - February 2017
Amongst all the other changes that we’re seeing in our world, one thing that is becoming ever clearer is that the long term is getting shorter. As a company, we are under more pressure from clients not to falter in our consistency when it comes to delivering returns that are communicated every six months through the formal statement but which can normally be viewed daily on the various platforms upon which client accounts are transacted these days. Gone are the days of an annual insurance company valuation which comes through the post which is normally, itself, some two months out of date!
Human nature is becoming more fickle. Just look at the world of football where a bad run of three games can see a manager lose their job. If you are running Birmingham City even a good run of results is enough to turn to someone else. What is the best way to manage an investment portfolio in a more volatile, short term, uncertain global backdrop?
There is so much to potentially keep an investment manager awake at night you have to decide what to worry about. Can you defend against natural disasters, terrorism or the irrational behaviour of influential individuals? Probably not. Should you be second guessing the outcome of an election, referendum, policy committee meeting or private telephone conversation? Probably not either. Should you worry over the direction that the world is heading, stated central bank or governmental policies, rising tensions between sovereign states or regions, general social mood and sentiment and overall market valuations. Yes, these are worthy of a slice of one’s allocation to angst.
What about demographics? It’s often a subject that is brought up in presentations but does the projection that at the current rate of population decline in Japan there will only be one person left in that country by the year 3030 have any bearing on our client whose next valuation statement is due in April? In our view we think that the investing public latched on to the long term story of the growing middle class in the Emerging Markets at the expense of keeping its eye on the shorter term ball that saw price capitulation in 2012.
In other words, there are a range of short term and longer term considerations that form parts of the overall jigsaw that needs to be pieced together, but one can’t position a portfolio to protect against all eventualities. Sometimes you have to accept that you take a short term blow to the chin.
Sometimes, simply holding something for the “long term” means missing out on opportunities. For example, if someone had bought a FTSE 100 tracker that excluded dividends on Christmas Eve 1999, it would have taken until September 2009 to have recovered, and not gone back to, your original entry point. In effect, 10 years of nothing. Many alternative investment opportunities existed elsewhere during that timeframe. But that’s not to say that the FTSE 100 was a waste of time. If you had invested in that same dividend-less FTSE investment vehicle on 6th March 2003 and held it all the way through the financial crisis until 27th January 2017, you would be sitting on a return of 234%. The same investment would have produced very different outcomes for different investors over the long term, so it is folly to dismiss any market or sector. It is the entry point that makes a huge difference to returns.
Our own portfolios reflect our longer term views that certain themes such as Cyber Security, Robotics and Automation, Biotechnology and Healthcare and an ageing population overall are all themes that not going away, so we are prepared to buy and hold investments that reflect this view.
Taking a 12 month view, we think that the European elections will probably be a bit of a red herring when it comes to losing sleep at night, and so we are happy to maintain an overweight position to European equities whereas many investors will prefer to wait and see.
To many, 12 months is short term. To us, the next two months is what we see as short term and we fully expect that the recent puzzling market euphoria following the Trump victory will begin to sag. A classic short term versus long term poser is the direction of the US Dollar. The last three weeks has seen the Dollar weaken in the face of unsettling announcements being made by the new President at a time the Dollar had strengthened significantly. Has the direction of the Dollar reversed for the foreseeable? We think not and have quite a strong conviction that it will end the year higher than it is now. So, as portfolio managers, do we chop and change the shape of our portfolios to reflect what we see as a short term shift of sentiment or do we hold firm in the expectation of longer term reward for shorter term discomfort?
The chart highlights just how entrapped we are by regular cycles since the Financial Crisis. A continuous overshoot in either direction is followed by a corrective move in the opposite, but the main feature has been that every correction has preceded a period whereby the markets continue on an upward trajectory (a bull market). This has led to the buy and hold strategy of the run-of-the-mill tracker fund appearing to be the most sensible and cost effective way to invest. People have very short memories and most will not have experienced buying a tracker on Christmas Eve 1999 and holding it for 10 years with virtually no return, having experienced most of those years in negative territory. How long can this current bull market that we’ve experienced since early 2009 last? It would be great if it carried on for ever, but sadly it doesn’t work like that. Could we be nearer the point of needing to pay more attention to the short term than taking the wait and see approach of closing our eyes, putting our fingers in our ears and waiting 10 years to see where we’ve ended up?
If the world is rejecting globalisation, and the US is becoming more mercantilist, and a trade war between the US and China is becoming more than simply a phrase in a newsletter, it makes sense to be cautious in the short term. Taking a longer term view (which needs to be done) we’d be increasing our sector bets as we’ve outlined before, staying overweight the Developed Markets over Emerging Markets, favouring the European and Japanese markets over the US in general, but investing in smaller domestically-focussed companies in the US, Europe, Japan and the UK in preparation for those multi-national megacaps that have flourished and made the rules to suit their expansion over the globalisation years realising that fortunes can go into reverse surprisingly quickly.
Who knows what will happen in the short term? We don’t. But we’ve got to be ready for it as it shapes what our clients’ accounts look like in the longer term.
Sources: BCA Research-January 2017
These are our views, as always, and don’t constitute advice in any way.
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