Investment Newsletter September 2013
A Balancing Act By Mike Deverell Investment Manager
There are plenty of reasons why we’re called Equilibrium Asset Management. We try to take a balanced view of the world, make rational decisions, and weigh up the risks and rewards of potential investments. We will always invest in a mixture of assets and, whilst we’re willing to back our convictions about individual investments, we are always aware that we can be wrong. We will never bet the house on a single asset class, fund or stock, because if we are wrong the results could be catastrophic. We will balance out riskier positions where we believe in the potential rewards, with lower risk assets which we expect will cushion volatility.
We have no bias for or against any single asset class. We will review all that we think are potentially investable, look at the possible returns and the chances of losing money, and adjust a portfolio accordingly. We will rarely eliminate an asset class in its entirety, but are quite happy to do so if we think the risks are too high. In short, we take reasoned, rational decisions based on facts. If the facts change, we change our minds.
Equilibrium Asset Management LLP (a limited liability partnership) is authorised and regulated by the Financial Conduct Authority. Equilibrium Asset Management is entered on the Financial Services Register under reference 452261. The FCA regulates advice which we provide on investment and insurance business; however it does not regulate advice which we provide purely in respect of taxation matters. Copyright Equilibrium Asset Management LLP. Not to be reproduced without permission
Investment Newsletter September 2013
Avoiding Armageddon
Unfortunately, not everyone behaves in the same way as we do. Many firms have inherent biases towards or against certain asset classes or views. Sometimes this is unconscious, but often a particular view is cynically put forward for commercial reasons. For example, I am regularly forwarded emails and newsletters from a particular organisation that I will not name. Every single one of these newsletters predicts some sort of catastrophic event which is about to destroy YOUR portfolio. Simply sign up now to find out how to avoid Armageddon and instead be beamed straight to financial heaven! This organisation has been consistently predicting the end of the world for some years and, as far as I am aware, the world is still here. The imminent catastrophic event they are predicting changes from time to time, but there is always something awful around the corner. In my view this is simply a way to scare people into giving this organisation money. Another well-known wealth management
Keeping Conscious
If we tell you we are positive or negative on a particular asset class, you can be confident that this is our sincere belief and will be positioning your portfolio accordingly. As we are paid a percentage of the assets we look after, if we get this wrong we will be penalised as our turnover will drop. Get it right, we benefit as do our clients. Biases can sometimes be unconscious ones. For example, if we are speaking to a European equity fund manager who is making optimistic predictions about the European market, we have to be aware that he or she may have an unconscious bias towards the asset class they invest in. Of course, this could be a conscious bias as they also want to sell us their fund!
organisation does the opposite. They are very clever at marketing, but essentially have one fund to sell to clients. This fund is pretty much all equity, all of the time. According to this firm’s marketing, they are highly active and always alive to opportunities and threats. And yet their 100% equity fund rarely changes its regional allocation, pretty much tracking the MSCI World Index at all times. Funnily enough, this organisation is nearly always very optimistic about equity markets. Of course they are! They have a 100% equity fund to sell! I am well aware that this month’s newsletter has turned into something of a rant. However, there is a serious point to be made. Both of these organisations’ arguments are always based on at least a small amount of fact. If it were not, it would not be great marketing as it would be easy to see through. However, marketing is exactly what it is. I’d even go so far to say that it’s fantastic marketing since it clearly seems to work, it’s just not great investing!
Conversely, we always remember a different property manager telling us before the financial crisis that property prices could never go down, just prior to a 40% fall. We are now somewhat wary of using that fund! We work hard to try to avoid even unconscious bias in our decision making. It is our job to take the emotion out of investing, be dispassionate and rational in our decision making. In short, try to remain balanced at all times!
We always have to be aware of this and we respect those fund managers who tell us the opposite. For example, one of the commercial property fund managers we use actually told us a couple of years ago that he was predicting very low returns in the coming period. We have always respected him for that and when we decided to re-enter the asset class this year, his fund was one of those we chose.
Equilibrium Asset Management LLP (a limited liability partnership) is authorised and regulated by the Financial Conduct Authority. Equilibrium Asset Management is entered on the Financial Services Register under reference 452261. The FCA regulates advice which we provide on investment and insurance business; however it does not regulate advice which we provide purely in respect of taxation matters. Copyright Equilibrium Asset Management LLP. Not to be reproduced without permission
Market Views September 2013
General Economic Overview Economic data continues to be more positive, with the UK growing strongly, US figures being revised up, and Europe now officially out of recession. Chinese data appears to have stabilised after a recent slowdown. Interest rates are likely to remain low for perhaps the next two years, subject to unemployment figures and inflation. We expect inflation to remain above the Bank of England’s target for the foreseeable future. Asset class key + positive - negative = neutral (normal behaviour)
+5 -5
strongly positive strongly negative
Asset Class
Score
Equity Markets After the recent recovery in equity markets we believe most markets look around fair value. Further growth needs to be supported by growth in earnings. However, there are still pockets of real value in our view, particularly in emerging markets. Our -1 score means we still expect a positive return but slightly below our long term 10% pa assumption.
Fixed Interest Corporate and government bonds in general have continued to fall of late, although the funds we hold have held up well. We have increased our score from a -4 to a -3 after these falls.
-1 -3
Property Over the past quarter, property has returned the equivalent of around a 6% annualised return. Capital values appear to have started increasing slightly and the rental yield remains stable. We have been increasing property of late and may do so again in the near future. Cash With interest rates remaining at record lows, returns on cash could remain below average for some time.
-1 -5
Balanced Asset Allocation For a typical balanced portfolio we are overweight equity and alternative equity, underweight fixed interest and are increasing property exposure. A neutral score (=) means we expect the asset class to move in line with our long term assumptions: 10% pa for equity, 7% for property, 6% for fixed interest, 5% for residential property, and 3% for cash. A +5 score means we think the asset class could outperform by 50% or more. A -5 means we think it could underperform by 50%. A negative score does not necessarily mean we think the asset class will fall. These represent Equilibrium’s collective views. There are no guarantees. We usually recommend holding at least some funds in all asset classes at all times and adjust weightings to reflect the above views. These are not personal recommendations so please do not take action without speaking to your adviser. Equilibrium Asset Management LLP (a limited liability partnership) is authorised and regulated by the Financial Conduct Authority. Equilibrium Asset Management is entered on the Financial Services Register under reference 452261. The FCA regulates advice which we provide on investment and insurance business; however it does not regulate advice which we provide purely in respect of taxation matters. Copyright Equilibrium Asset Management LLP. Not to be reproduced without permission