Contents |
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1. 2022 performance- welcome to the Land of Grim. |
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2. Bridging The Gap. |
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3. Filling-in The Gap. |
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1. 2022 performance- welcome to the Land of Grim.
Managing performance expectations: an art, not science.
One of the most skillful arts of a financial adviser is the highly subjective issue of managing investor performance expectations. Whilst a performance result is a statistical fact (as at any specific point in time), the reactions of Messer’s Patel, Mohammed, Smith et al to the very same result is always varied. A “good result”, you see, is like beauty- it is in the eyes of the beholder and not in the statement of fact. This is the front door to the subject of The Land of Grim: investment performance 2022.
We start the subject with reasons to be grim, we will get to the happy pills, but first, why is 2022 likely to be grim? Partly because the H1 YTD stats are already grim. At the time of writing the biggest risk/equity index in the world, the US S&P 500 index is some 20% down for the YTD. With help from Momentum Asset Managers, we reflect on a grim H1. Figure 1 below (June 2022) shows global YTD equity markets sailing grimly south. In Figure 2, the major Interest rates are universally making upward north easterly moves which means (because bond values go down when interest rates go up) that bond values are heading equally grimly south.
Of course, H1 is consigned to history. Leaving H2 to climb out of The Grim whilst carrying: the biggest inflationary burden in Europe and the US for some 40 years; the continuing impact of the Russian War; the clear signs of a slowdown in the biggest global economy- the US, suggesting that the possibility of recession is moving towards probability. All grim.
However, on the upside the current burdens do not necessarily impact H2, as Mark Twain observed “Prediction is difficult- particularly when it involves the future”. For Glyn Owen (Momentum) whilst not necessarily expecting a V-shaped equity market recovery, he does point out that “inflation showed some signs of peaking; US CPI fell to 8.3% in April from 8.5% in March”. From this point, Andrew Hardy (Momentum) believes that markets will stabilise soon- pointing out:
“Although deteriorating, the global economy is still in reasonable health”- quoting US unemployment at a half-century low as one of some good indicators of health.
Policy Conditions, i.e Central Bank action, is still loose by historical standards. So, whilst interest rates have been used to fight inflation- the actual rates have been raised from a “very loose level”.
Inflation is likely to peak soon. Plus, longer term inflation expectations remain well anchored. The so-called “5-year 5 year” inflation rate (the expected annualised rate of inflation for 5 years starting in 5 years’ time) stands at just 2.3%.
China is likely to start loosening lockdowns.
Falling equity markets mean that valuations have improved significantly. “Good businesses endure” meaning if they are cheap- buy them. Indeed, Hardy points out that all forms of US equity market downturns create opportunities and he quotes the US Equity Market as holding a 1900 to 2020 7% CAGR despite regular downside deviations.
2. Bridging The Gap.
Science not art.
The thing about Grim is that its negative impact is directly proportional to the time left before you can use the investment portion as cash. Given that, even in retirement, a portfolio should be managed with three components being short, medium- and long-term profiles, then (ideally) there is always an element of a portfolio which should stay invested in the Land of Grim. In other words, the “stay calm, stay invested” mantra gets wheeled out however grim H1 was and however unexciting H2 might be. Why?
In David Henry’s (Quilter Cheviot) excellent article “Taking Stock”, he points out that that since 1970, (as of June 2022), global stocks have been through their eleventh bear market (in US dollar terms). Defined as a 20% fall from its peak.
Yet the medium-term impact is only important if you sell during the 20% fall. Once again emphasising the “you only lose by selling” adage. This is demonstrated in Diagram 4: Bear Market Recoveries.
The QC article reiterates the point that the thing about poor annual results is that they are simply a point in time. If that point in time is the day before you need the assets as cash for its means-of-exchange function, then that is simply bad planning. If the point of time is at least 5 years from the means-of-exchange cash function, then why would the odd year of poor performance in Grim Land matter?
The challenge for financial advisers in getting the “stay calm” mantra across is based on what behavioral scientists see as the mistake made by traditional economists in thinking that man is rational. Jeff Wagner explains “Economic Man pursues goals by responding consistently to incentives and making appropriate trade-offs as needed. Economic Man thinks carefully about both the present and the future and anticipates the likely consequences of his actions on his material well-being.”
The problem is that “rational Economic Man” is not typical in our client base. Exceptionally rare amongst inexperienced investors. This experience is supported by the empirical study of behavioral scientists who believe that man is not as rational as the traditionalists believe.
Since the days of Daniel Kahneman’s Nobel Prize for working out that we get angrier when we lose money than when we make it ( OK- dumbed down), more prizes for Economics have been won as behavioral scientists work out how to get people to think rationally when it comes to managing investment portfolios. For now, being rational means- look at David Henry’s article and.. STAY CALM, STAY INVESTED.
3. Filling-in The Gap.
Science and art.
Even though we share The Land of Grim for now, doing nothing with our “new money” is not an option as petrol pump prices continue to rise and as fingers crossed on stabilisation has yet to produce results. We look to Warren Buffet for guidance on what to do to combat inflation with down turned markets and his response is “buy, buy, buy”. Buy what? We list 3 considerations for discussion with your financial adviser.
1. Regular premium investing.
Worth a look: the S&P 500 was down 20% YTD during June. As pointed out by Hardy – this is an index with a 7% CAGR between 1970 and 2020.
Worth a look: Investor Trusts guaranteed 10-year plan which tracks the S&P 500 and guarantees your capital over a 10 year period. The plan can be paid in tranches—i.e. buy (say) 3 years at todays prices.
The averaging process (regular investing) is worth a look even for more experienced and wealthier clients.
2. Property.
Worth a look: finding an income and maintaining capital value has been very difficult for several years. Investment Property has become a logical choice as part of an overall retirement portfolio for holding capital value and providing part of the income.
The first bullet is not diminished by the fact that many property prices might well trend downward. Investment Properties fit into the less liquid category- so drastically Grim falls less likely. Nevertheless, for both existing financing and planning a future purchase this is an excellent time for planning….. fixed versus variable rates- a good time to review the financing of both existing and future purchases.
3. Go Active: Active versus passive management.
At Mondial we have long been fans of active management over the passive. In idea 1 we reveal that there is always a role for “passive” index tracking in any overall balance sheet. In other words, our preference isn’t 100% one-way towards active.
By active we mean multi-asset/DFM management where performance expectations are not to shoot the lights out, but to avoid excessive Land of Grim, downside deviation. Avoid catastrophic loss.
In the Land of Grim, active managers have been able to move towards Absolute Return assets (avoiding correlated market results) , diluting the impact of Grim, and have generally held up well versus market indices. Which is why we favour them especially for the investment and management of capital sums.
END.
For more details, or to contact Sean Kelleher CEO, Mondial Dubai LLC,
please contact us at
+971 56 2228 535