According to German Finance Minister, Wolfgang Schauble, as at last week, investors may not have seen “the worst of the crisis”. Note to self: hold back that bull within you.
Schauble’s commentary places the proverbial “damp squid” on our last articles which leaned towards the bulls rather than the bears, in the light of “good looking” rather than ugly asset prices to end-September. (Global equities up over 18 per cent, emerging equities up over 15 per cent, convertible bonds up over 10% and commodities around 10 per cent).
And so to my real point: some investors might be wandering why their portfolio did not go up with these indices? A tricky question for inexperienced and many experienced investors alike.
There are three possible explanations: Firstly: rarely (I mean one in five) do fund managers out-perform market indices. They frequently miss the best trading days.
Secondly: whilst investors have the opportunity to buy their own trackers at a cheaper rate than a fund manager fee, they need to know which trackers (markets) to buy, and when. As the Nobel Prize winner, Harry Markowitz noted: the most efficient way to invest money is to invest 100% of your money in the asset that goes up the most. When the Nobel guys tell us how to get the timing right, I will pass it on to you (after I have retired).
Thirdly: there is an informed school of thought, that supports Schauble, which believes the debt which took twenty years to build-up is unlikely to be unwound in comparative moments. Put another way: because a market is driven upward by short term buyers being more numerous than short term sellers, it doesn’t mean that they can’t fall down tomorrow. This fear currently separates market indices performance from many portfolio results.
Put into perspective, this means portfolio managers must focus on the medium-to-longer term to get results. The slide from Momentum Asset Managers shows how a UK investor in the FTSE 100 was best off taking the knock of “Black Monday” on the chin. Remember “Black October”? Between October 19th and the end of October 1987, the FTSE shed 26.54%. Other markets crashed in tandem.
Yet, the slide shows that even two significant crashes later, the FTSE component of an investment will have done a decent job over the 15 years between 1987 and 2012, the average length of a pension plan.
The slide helps to show that ‘patience’ over long periods works really well for those who do not chop and change regularly and who continue to buy with regular contributions (averaging).
However, a lump sum invested in 1987 will have endured some serious trauma and an averagely competent portfolio manager should have diversified the overall asset allocation into a number of smaller investments, without taking a risk on specific markets or specific asset classes. The aim of such action is to avoid massive losses rather than to partake in massive gains. This will be another reason why fund and portfolio managers have not necessarily been chasing “scores on the doors”.
Back to Schauble. The possibility of downside risk remains. Multi-Asset Mangers Momentum remain tethered to the view that our current economic environment is not normal. James Klempster, Global Investment Manager at Momentum, quotes Goldman Sachs: “We were seeing things that were 25 standard deviation events, several days in a row”. He continued: “Investors should recognise that the world is far from normal”.
1. Short-term interest rates across the developed world are effectively at zero.
2. Two-year government bonds in six Euro countries are negative.
3. Ten-year safe haven bonds at record lows.
4. As a result of quantitative easing the balance sheets of The Federal Reserve, The Bank of England and The European Central Bank now represent over 30 per cent of those economies.
5. The post-Lehmans recovery, when the economy of the developed world contracted 5 per cent, is weaker than any recovery since the Second World War.