We have been saying for some time now that the musical ‘monetary easing’ chairs will come to an end sometime. When the music stops it is likely that investors will find that at least a couple of chairs are missing.
Quarter three 2017 saw the start of tightening monetary conditions that we have argued are needed to restore normality to markets. We saw no immediate fallout from this despite the addition of stretched equity valuations, talk of a bond bubble, rising debt and an unhinged US President.
Given the potential headwinds our clients face heading in towards the end of the year it is pleasing to see the discretionary managers that we are using positioning themselves defensively. Some are building cash positions, some are being very focussed with equity choices and some are investing heavily into alternatives (anything that isn’t a share or a bond). Even within alternatives there is a range of approaches with some favouring absolute return funds and some focussing on more complex market hedging strategies.
This is great news, as it means that for clients, we can often blend together two or more discretionary companies that have different approaches to markets to give them more diversity.
So with so much potentially negative news why aren’t we recommending disinvesting? Well two reasons; firstly because we charge a fixed fee and not a percentage of assets invested we have no personal income bias and have indeed recommended that some clients disinvest or not reinvest where there is a medium term need for capital. Secondly we are recommending that everyone else remains invested for the long-term (if that is their personal investment time horizon) because no one knows when values will fall until it has happened.
We are reminded of a client of ours whose fund manager brother-in-law recommended he move to cash in 2011. This fund manager had moved his own portfolio to cash, had recommend his family do likewise but couldn’t move his investors money as the terms of the fund didn’t allow it. All of his reasons in 2011 that markets might crash were plausible but we argued that we didn’t know and he couldn’t know the unknowable. If he had moved to cash our client would have missed out on double digits returns and even worse would have been stressing about when to re-enter the market ever since.
Lastly and most worryingly, news reaches us that one asset manager that we know well is currently reducing their diversification and moving out of alternatives and into equities and fixed interest. Time will tell whether this is precisely the worse time to do this but we are not currently using the discretionary companies on our approved list that are only investing in equities and bonds (even though their past performance is sometimes amongst the best).
In summary the passive funds range we use performed positively after fees in Q3 and seriously outperformed the active discretionary managers we use, taking the top 3 return spots regardless of risk level. This continues a trend that has played out for the last five years but may backtrack if markets start to go into reverse.
An active discretionary manager still holds top spot over one year with a 15% net return and it is good to see several active discretionary managers holding their own against the passive equivalent funds at the top of the range over this timescale.
There is one consistent active discretionary manager at the bottom of the pile in each risk category but we think that their defensive approach may come good sometime soon.
Here’s to a calm market run to Christmas.