Despite European Central Bank President Mario Draghi’s reassuring “whatever it takes” words, Europe is still entrenched in a vortex of austerity and has much work to do on the political front. As summits come and go and the eurozone lurches from one phase of the crisis to the next, any progress towards a lasting and viable solution seems painfully slow.
This should not come as a surprise though because the problem is more political than economic. The decisions and agreements which are necessary to hold the euro together will not happen overnight – we could be looking at a weak European economic outlook for many years to come.
Political and economic uncertainty surrounding matters of such global importance leads to nervousness. Choosing fund managers is difficult in any environment, but trying to shut out all the ‘market noise’ and focus solely on the merits and qualities of underlying investments is particularly difficult.
Such uncertainty has pervaded investment markets for quite some time now and, while a resumption to more fundamental, bottom-up investment is clear, exactly when this will be is not. However, via careful and skilful stockpicking it has still been possible to generate strong returns through diligent bottom-up investing. This is also how some approach fund selection. Fund managers rigorously interview and monitor managers and, as best as possible, look beyond any immediate market concerns.
The difference between the best and worst performing funds between June 2011 and June 2012 was a staggering 79 per cent. Of course, this disparity of returns between investment funds is nothing new, but it does serve to highlight the importance of effective fund selection and the challenges that investors face in this regard.
Through active management and constant monitoring, managers seek to identify fund managers who can consistently outperform their peers as well as those who perform well in certain markets. Resources are dedicated to finding future long-term top performing funds. Furthermore, once a fund is chosen the work has only just begun. In order to ensure that the funds remain at the top of their game, managers continually monitor their selections and their peers using quantitative and qualitative methods which private investors simply do not have access to; at the slightest sign of weakness managers scrutinise their selections vigorously so as to determine whether the issue is merely a blip or something more fundamental that requires action. However, managers take pains to avoid tinkering with the portfolio needlessly, acting only when we believe necessary.
Investing for the long term sounds like a very simple and easy strategy but you would be surprised by how few actually adopt it. In today’s fast-paced environment of ‘now, now, now’, the desire for instant gratification runs through to investment-return expectations as well. To add insult to injury, as wider macro-economic influences have driven investor sentiment and behaviour, having a long-term outlook has become even harder. Investor jitters have become commonplace and the temptation to react to short-term news flow is huge.
What, however, investors should be worried about is permanent loss of capital and this is all about assessing an asset’s long-term prospects. If a company builds a factory, for example, it expects to generate returns from it for at least 10 years, as investors should from its shares. Furthermore, short-term price movements are mostly inconsequential as they are largely about temporary loss (and gain) of capital.
Some managers currently favour equities over developed market government bonds as, while they have generally had a strong year so far they still look attractive in relative terms. A recent Investec report claimed that “not since 1957 have equities been so attractively priced relative to bonds.” This is more a reflection of bond valuations than anything else. However, with 10-year gilts standing at 1.6 per cent compared to the average yield on the FTSE 100 for 2012 of 3.7 per cent, the case appears pretty strong.
My view is that certain equity markets are cheap, the UK and Europe for example, and that having the contrarian bravery (certainly in the case of Europe) to enter into the market now will be rewarding over the long run. Bouts of often painful volatility will have to be weathered and endured though, and a decent pair of ear-defenders would not go amiss in order to assist with blocking out the noise. These are the times when resolve gets severely tested.
From a multi-manager perspective, an investment philosophy can be defined and expressed in many forms, but common sense alone suggests buying a “poor quality” asset at the wrong price is a bad idea. In a nutshell, our reasoning for disliking government bonds is that we question the logic of buying an already expensive asset in the hope that it will become more expensive. Why lend money to a government at 1.5 per cent return (that is, less than inflation) when they can simply print more at any time and devalue what you hold? We prefer to buy quality assets at a fair price and hold on to them for the long term in the expectation that they will rise. Shorter-term trading and over exuberant attempts at market timing are fraught with danger.
All of that said, one cannot avoid having and taking a view. At present, value ultimately resides in real assets such as equities, but some managers have taken out some shorter-term insurance against prices pulling back in the coming months as the noise gets louder. I believe that this is a sensible way to keep one’s eyes fixed on the long term, while retaining sensitivity to the more immediate events. In terms of longer-term asset allocation calls, some managers continue to run an overweight Asia position based on the belief that Asia will continue to be the most dynamic economic region for many years to come.
To some, a long-term approach may seem somewhat boring, but consistent above-inflation returns over the long term are not to be sniffed at these days.
Aidan Kearney is co-head of multi-manager funds of Aberdeen Asset Management
