Magus Investment Committee meeting – Quarter 4 update
Reflecting back to this time last year, we were yet again, oblivious to what lay ahead of us.
Every Investment Committee meeting is a good time to reflect on what has happened, what we have learnt, what’s worked well, what has not and, what we can do to enhance our investment proposition further. Our agenda covered the following:
- Market review – analysing the major asset classes against the assumptions over the time period
- Systematic vs judgemental debate – reviewing any potential evidence challenging our investment philosophy
- Governance review – assessing asset classes used in our portfolio construction and assumptions of the expected returns
- Portfolio review – judging our current products and their allocation in the portfolio against the best in class and comparing the performance against our competitors
- Rebalancing – assessing the model deviation from target allocation
- Risk review – ensuring our operations fall within the regulatory framework
- Ad hoc items – reviewing the availability of Sustainability premium in Emerging Markets and within fixed interest environment
This year has yet again shaken everyone to the core with so many unprecedented events. but from an investment perspective, events happen all the time…affecting markets to a higher or lesser extent.
We start every year not knowing what is in front of us and this year has not been much different. Was there anything else we could have done differently 12 months ago? The simple answer is no – if you believe in your investment philosophy and, if the evidence does not suggest otherwise, then you stick with it. We always say that we cannot control the future, but we can and do control the process that will keep taking us forward.
Our investment philosophy is tilted towards value and smaller, profitable companies. There are on average 450 different factors that any asset or wealth manager can follow. However, the research still shows that the ones we have adopted still deliver. The markets this year have shown a high degree of volatility and we have clearly observed the “flight” to value, which has worked well on the equity side, minimising the losses relative to the market as a whole.
Even more was happening in the fixed interest side and the balanced portfolios have not been immune to risk this year. You may have seen the headline stories questioning the 60/40 portfolios. Yet again having the quality bonds, together with shortened duration did well protecting the portfolios from bigger swings, especially in the second half of the year. It is worth noting it has been a steep learning curve for a lot of people in the industry and beyond.
Systematic vs judgemental debate
The evidence still shows that active management style is not delivering on its promises to outperform. We have all the evidence to be assured that our approach is still proving to be superior against both purely passive and fully active propositions. The message is simple, in the world of speculation if you have a methodology based on research and evidence and it works, stick with it, and that is what we are doing, but we are also looking for ways to enhance our proposition even further. The markets go and adjust to changes all the time and we are monitoring these changes and assess their impact on our proposition. If we see evidence supported by research that we ought to incorporate something new into our methodology, we will make sure it does happen.
I already mentioned that there have been many lessons to learn this year, especially around bonds. We remain fully behind our approach, but we recognise that some things have not worked as well as we would have liked. This is mainly because the availability of products in the market has its limitations, and we are working to address this.
Despite the challenging year, according to the latest Albion performance update, our portfolios ranging from 60 to 100% equity are still within the top 5% performing portfolios over the last decade. This has been a norm and largely expected from the perspective of evidence-based investing. We have looked closely into the composition of the portfolios and are asking:
- Should emerging markets exposure be re-aligned with the global market cap and so to bring it down to around 15%?
- Should we introduce REITs (diversified commercial property funds) and to what extent?
- They are a proven portfolio diversifier, having low correlation with bonds and equities
- They could potentially enhance the returns without compromising the risk
- Is our Sterling inflation linked bonds fund still good value and has it played its role well in the portfolio?
- Should the extra additional exposure to smaller and value companies be simplified?
- Finding a better way to gain additional smaller/value exposure, whilst reducing the cost, without compromising the performance
These questions will be looked at in further detail, fully researched, and modelling undertaken to make final decisions.
We all know and appreciate the importance of keeping the portfolios within the agreed risk tolerance. Having 11 different risk scales, we questioned if the small margins between the portfolios are still appropriate and justify the extra trades needed to be conducted annually. All in all, the majority of our clients are centred around a few risk characteristics, with our 60/40 portfolio being the most popular. In view of this, we will review further the desired number of portfolios on offer and the correct trade-off between equities (pursuing returns) and bonds (managing risks).
Investing is not always a pleasant experience. However, as Warren Buffett once said “Money flows from impatient to patient investors”. In the history of stock markets, in any given rolling period of 30 years, 10 of them would have produced negative returns. Not only this, in any given year, the portfolios will go up and down in value.
None of us can consecutively and successfully predict when the markets are going to improve or detract, but we are much better adopting and accepting the mantra that it is the time in the market not timing the market that counts. In the same period of any rolling 30 years, the patient investors would have been likely rewarded with double digit annual returns (*if they trusted the right people to manage their money).
The war in Ukraine is ongoing, inflation continues to hit everyone hard, and last December proved being the coldest over the last decade. Despite all of it, the markets still prove to work efficiently, pricing all the information instantly and they always look forward… most of the time with a degree of optimism.
We have clients who have been with us for a long time and others that only started their investment journey relatively recently. Investing is a long-term journey and if you follow our 10 investment pillars, you will undoubtedly have a great investment experience in years to come.
This article is distributed for educational purposes and should not be considered investment advice or an offer of any security for sale. This article contains the opinions of the author but not necessarily the Firm and does not represent a recommendation of any particular security, strategy, or investment product. Information contained herein has been obtained from sources believed to be reliable but is not guaranteed.
Past performance is not indicative of future results and no representation is made that the stated results will be replicated.