“Howay the Ladds Monthly Spotlight” – January 2022

So, another year is done. The last couple of years have been interesting for investors, from the lows in March 2020 to the incredible rally that followed. Mixed in with that we saw the “COVID trade” switch to the “re-opening trade” on Vaccine Monday. Then in 2021 sectors and regions which did well in 2020 performed less well.

We thought in this update we would just put some context to how we approach investing.

January Spotlight

“To do nothing at all is the most difficult thing in the world, the most difficult and the most intellectual” – Oscar Wilde

We have a very “simple” philosophy, and that is to grow wealth slowly over time by being long term investors. By this we mean, that although short term events can be worrying, we focus on long term fundamentals.

Taking this a step further, we are aware that some portfolio managers like us will change holdings on a regular basis, and this sometimes brings into question our approach. If we could say with confidence that something would happen then we would be happy to tilt and change the portfolio to reflect this. However, in the research we do, the one thing that we know with certainty is that we don’t know what the future will hold.

There are certain themes that can be seen, and logically we know are likely to be long term winners. Examples would be the growth of developing economies like China, and new technology centred around tackling environmental challenges and automation.

I have been doing fund research for over 20 years and it is very much a game of two halves. In late 1999/early 2000 I set up a fund list for an insurance company and of course it was full of the best tech funds because that was where the money was going! Between 2009 and 2011 I helped develop a Hargreaves type platform, and the funds we promoted were those we knew would sell (the likes of Woodford and Bolton are good examples of managers we promoted).

Doing this job is very different. Let me dig a little deeper. A few years ago I invested in shares, and I can tell you all the great successes I had! I can also tell you how good I was. The reality was the oppositive. Any success was likely more about luck, and often when I held something that was doing well, I didn’t want to hear anything negative. I guess I fell into the trap of confirmation bias. So, I no longer invest in shares and only invest in funds, and this leads nicely to what we do.

What I have learnt is that there are some very clever people out there. There are fund managers who are very active and are constantly changing the holdings. However “good” they might be, these are the ones we look to avoid. There are different styles in investing value (it is cheap), quality, growth etc. Especially now I hear a lot of people saying value is back in favour, and they may be right. But what I see is that value has short periods of outperformance and then lags. If I could time it perfectly, I could tilt the portfolios to this and then exit at the perfect time, but when is that time?

So, what do we do? Firstly, it is worth repeating that we are long term investors with at least a 5-to-10-year outlook. That is the only way to grow money. Secondly, we are not trying to be clever: we stick to a process that works, and thirdly we look to find the very best fund managers.

To look at a 5-to-10-year time frame when no-one has a clue of the future seems strange. But the way we approach this is to have a diversified mix of holdings across equities and specialist investments (infrastructure, property etc). This takes out the guess work of what region or sector is likely to perform best at any point in time because we look at it as a collective. So, for example although emerging markets and China performed weakly, the portfolios have still delivered near double digit returns in 2021. I could guess that China and Emerging Markets will perform the best in 2022 and tilt everything to benefit from this but then I could be wrong. Do we think Emerging Markets and China will deliver strongly over the next 5-10-years? The answer is yes, and therefore they are a part of the diversified portfolio.

As part of the process we look for the very best fund manager and a safe pair of hands. We have a rigorous process of meeting fund managers, understanding what they do and then building a portfolio of those very best names. If you study the portfolios there are funds that have been there since we launched them, and so we are happy to hold forever. In the yearly review we will highlight three funds which underperformed this year after a brilliant 2020. If we understand the reasons for this then we are happy to continue to hold.

I am often called the Boffin in the room. During a typical week I will likely have two or three fund manager meetings, sometimes more, as well as economic updates. I spend my time researching, following the returns, listening and watching. Sometimes we identify something that doesn’t appear to be working and spend months trying to understand it and come up with options. We have recently done this with a global fund, and the conclusion was that circumstances have played against the global strategy and the best thing to do at this stage is nothing. Those months of work are not wasted because if the strategy continues to underperform, we know where to turn. As it turns out the performance seems to be improving.

One final point is that we must be the most frustrating asset allocators! I was talking to a UK fund manager for nearly five years before we added the fund to the portfolios. The time must be right for the portfolios and for the clients.

In summary, I know it can seem that we do nothing, especially when markets are volatile or when funds appear to underperform. The reality is very much the opposite. We rebalance once a year to follow a disciplined process. Almost every day we are doing some work on the portfolios, whether meeting fund managers or studying trends and the markets. Ultimately, if we can grow wealth slowly then we are achieving our outcome. Oscar Wilde in part is right that doing nothing is often the most difficult thing to do. Hopefully this brief insight shows that a lot happens in the background, even when it appears that “nothing” is happening on the surface.

Tracking the market

December was a better month for markets. (Perhaps the Santa Rally came to play after all!) Bitcoin was again down but still up significantly this year but it does show the volatility of the asset class. Even the FTSE joined in the end of year rally.

1 January 2021 31 December 2021 Increase
Bitcoin USD 29,374.15 47,157.32 +60.54%
Crude Oil 47.62 75.21 +57.94%
S&P 500 3,700.65 4,766.18 +28.80%
Stoxx Index 401.69 488.71 +21.66%
FTSE 100 6,571.90 7,384.50 +12.36%
Gold 1,944.70 1,827.50 -6.03%
Hang Seng 27,472.81 23,397.67 -14.83%
  30 November 2021 31 December 2021 Increase
Bitcoin USD 57,005.43 47,157.32 -17.28%
Crude Oil 66.18 75.21 +13.64%
S&P 500 4,567.00 4,766.18 +4.36%
Stoxx Index 462.96 488.71 +5.56%
FTSE 100 7,059.50 7,384.50 +4.60%
Gold 1,773.60 1,827.50 +3.04%
Hang Seng 23,475.26 23,397.67 -0.33%

Sources of data: CNBC, Yahoo Finance & Reuters

What is in, and what is out?

At the end of the year there were seven energy investments in the top ten performers. The top three were iShares Oil and Gas Exploration and Production +70.8%, iShares S&P 500 Energy Sector +55.2% and Schroders ISF Global Energy +49.5%.

At the bottom there were five emerging market funds (covering Brazil, Turkey, and China). The worst performers were VT Garraway Absolute Equity -34.7%, LF Equity Income -34.4% and iShares MSCI Turkey -28.2%.

Looking at data from the Investment Association up to the end of October the UK remains unloved. However, money has also moved away from Money Markets, Emerging Markets, North America, and Global Equity Income. The beneficiaries of this movement in money are Fixed Income which saw net inflows of +£505 million, and mixed asset strategies +£614 million.

Most of the money being invested is currently going to responsible investments, but this remains a tiny percentage of all money being invested in the UK.

In summary, we have seen a reversal in fortune, with “value” sectors like energy delivering the strongest returns, although this has dropped back towards the end of the year. Where Emerging Markets did well in 2020, this year has been harder to navigate. Seeing money move out of Money Markets to Fixed Income is interesting, and clearly responsible investments will continue to see a growth in assets.

Sources of data: TrustNet, Investment Association

Talking shop with fund managers

In December we had 8 fund manager meetings. We have completed 132 fund manager meetings this year. Below are some insights from the meetings in December.

What is the value of a company?

According to Lord Abbett in 1975, 83% of a company’s value was made up of tangible assets. This is now just 16%. It is the intangible parts that are the true value of company. This includes, for example, intellectual property, business rights, brand value, patents, trade secrets, proprietary data, and relationships. Therefore, those companies that spend the most on Research & Development are those that are most likely to be rewarded.

View of what 2022 will look like

We have listened to updates from BMO, Vanguard and JPM and the messages are consistent. The concerns centre around higher inflation, COVID variants, monetary policy mis-step and slower growth.

All agree that growth is likely to be slower in 2022. The view is that the latest variant will stall the recovery, but this will be temporary and just delay everything until the Spring. Expectations are for more rate rises from the US and UK during 2022. Although we are seeing slower growth, both consumers and corporates are spending and this means that the view remains positive for equities going into 2022.

With raising rates, most are negative on bond markets and believe returns will be subdued in 2022.

General disclaimer: The data has been sourced from external sources and although we have looked to ensure this is as accurate as possible, we are not responsible for data they supply. The view on the market is written in a personal capacity and reflects the view of the author, it does not necessarily reflect the views of LWM Consultants. Equally the views under talking shop are those of individual fund managers. Individuals wishing to buy any product or service because of this blog must seek advice or carry out their own research before making any decision, the author will not be held liable for decisions made because of this blog (particularly where no advice has been sought). Investors should also note that past performance is not a guide to future performance and investments can fall as well as rise.

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