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Archive for the ‘Investment Management’ Category

The biggest investment question of all

What I like about the market analyst James Montier  is the honesty of his approach to following markets. He thinks deeply about the issues and although he is best known as a behavioural finance expert, his analysis is more wide-ranging than just that. In an interview earlier this year he was asked about the single most important challenge facing any investor at the moment – namely, how to build a portfolio in a period when everything seems to be too expensive. This is how he answered: Read the rest of this entry »

Written by Jonathan Davis

July 7, 2014 at 1:02 PM

Crime and punishment in high frequency trading

Theer is another fascinating article by Michael Lewis in the latest issue of the glossy magazine Vanity Fair, which is fast establishing itself as a must-read destination for students of folly, drama and malfeasance in the world of financial markets (no shortage of good raw material there). His latest piece chronicles the curious case of a Russian computer programmer named Sergei Aleynikov, who was prosecuted for stealing computer code when he left Goldman Sachs to join a rival high frequency trading  operation. Mr Aleynikov’s conviction was quashed on appeal, but only after he had spent a year in jail. The article is interesting not just for the human story that Michael Lewis unfolds with his characteristic verve, but also for the light that it sheds on the phenomenon of high frequency trading. (Students of the phenomenon that is Goldman Sachs will also find plenty of evidence to support their prejudices, good or bad).

Here is one passage from the long article:

By mid-2007……Goldman’s equities department was adapting to radical changes in the U.S. stock market—just as that market was about to crash. A once sleepy oligopoly dominated by NASDAQ and the New York Stock Exchange was rapidly turning into something else. There were now 10 public stock exchanges in New Jersey alone, all trading the same stocks. Within a few years there would be more than 40 “dark pools,” or private exchanges, one of them owned by Goldman Sachs, also trading the same stocks. (Why the world needed 50 places, most of them in New Jersey, in which to buy and sell shares in Apple Inc. is a question for another day.) Read the rest of this entry »

Written by Jonathan Davis

August 5, 2013 at 12:55 PM

Abenomics is a vote-winner

Buy on the promise, sell on the news? That may be the initial temptation of those of us who have been happily playing the Japanese recovery story for the last few months, now that Mr Abe’s Liberal Democratic Party has won a resounding victory in the Upper House elections at the weekend. The result means that with a comfortable majority in both chambers, the flag-waving Prime Minister is well placed to push through his programme of economic reforms, aided by the expansionary monetary policies now being embraced by the Bank of Japan. Despite the size of his majority, some will worry that the impetus to complete the much-needed structural reforms – the so-called third arrow of Mr Abe’s strategy – will weaken now that the election is over. The LDP traditionally represents many of the powerful vested interests that have killed reform agendas so many times in the last 20 years; could they do so again?

It is possible, but my instinct is that answer will be no. The Japanese equity market retains its attractions. The key insight that the professional investors I talk to keep bringing back from Japan is that for the first time in living memory all the interested parties – the government, the central bank, companies and now the electorate – are all aligned in the same direction, prepared to give Abenomics its head. The programme is certainly not without its risks, and it  has important implications for investors in other countries around the globe, as Henry Maxey, the CEO of Ruffer LLP, points out in its latest investment reviewRead the rest of this entry »

Written by Jonathan Davis

July 22, 2013 at 11:46 AM

Debt: still very much in favour

Reports by the Wall Street Journal that officials at the Federal Reserve are drawing up plans for starting to rein in the current programme of QE are worth noting. Jon Hilsenrath, the Journal reporter who wrote the story, is widely held to be the Fed’s favourite unofficial channel for making known its future intentions.  Could it be that even the Fed is starting to get concerned about the runaway effect that its monetary stimulus is having on asset prices? Throw in Mr Bernanke’s warnings about excessive risk-taking last week and it is tempting to suppose that even the Fed would be happy to see a pause in the the advance of risk assets, at least for now.

That would certainly seem to sit quite well with the normal midyear seasonal pullback that we have seen for each of the last three years. The worry with QE has always been that it is easy to get started on it, but very difficult to stop. Now that the Japanese have joined the QE party in an even more dramatic way, the ripples are being felt in financial markets all round the globe, compounding the scale of the eventual problem. Yields in a number of credit markets (eg junk bonds, leveraged loans) have fallen to what look like dangerously complacent levels. Companies such as Apple are obviously happy to take advantage of the ultra-low rates on corporate debt, but whether that achieves any longer term benefit remains to be seen – not so obvious when the purpose of the debt is committed to share repurchases rather than new capital investment. All the while a return to the levels of economic growth we witnessed before the crisis broke in 2008 remains stubbornly distant. Read the rest of this entry »

Rich valuations for the stock market’s global elite

The news that Paul Walsh, the CEO of Diageo, has unloaded a huge amount of stock (£16m) after exercising a raft of share options draws attention to the extent that the prices of high quality companies with strong global business franchises and the ability to generate cash have been bid up to very rich levels. The veteran market-watcher Richard Russell has observed something similar on the other side of the Atlantic.

What do billionaires Warren Buffett, John Paulson, and George Soros know that you and I don’t know?  I don’t have the answer, but I do know what these billionaires are doing.  They, all three, are selling consumer-oriented stocks.  Buffett has been a cheerleader for US stocks all along. But in the latest filing, Buffett has been drastically cutting back on his exposure to consumer stocks.  Berkshire sold roughly 19 million shares of Johnson and Johnson.  Berkshire has reduced his overall stake in consumer product stocks by 21%, including Kraft and Procter and Gamble.  He has also cleared out his entire position in Intel.  He has sold 10,000 shares of GM and 597,000 shares of IBM. Read the rest of this entry »

The “most dangerous investment environment ever”

These are the latest comments on the implications of the drastic policy measures being adopted by central banks in a so far unsuccessful attempt to stimulate their economies. They come from one of the most successful managers of a “real return” fund in the UK. Iain Stewart has been running the Newton Real Return fund since its launch in 2004, with only one small down year (2011). Anyone interested in capital preservation in the current uncertain climate is likely to find much that resonates here. The full story can be found here (source: FE Trustnet).

“Fixing the price of government bonds is a very risky policy as it can lead to mis-allocated capital. I would say now is the most dangerous environment I have ever seen. It feels nice when stock prices just keep going up, but if anything, those assets are being pushed up by policy. It may be an uncomfortable thought, but we need to keep reminding ourselves that the reason we are all bathing in an ocean of liquidity some five years on from the financial crisis is that we have, to date, failed to lay to rest the legacies of the last cycle. The problem is that forcing mature, ageing economies to grow through monetary easing is recreating the distortions and excesses which caused the crisis in the first place”. Read the rest of this entry »

Written by Jonathan Davis

April 23, 2013 at 3:06 PM

Reality and euphoria in the equity market

In the modern era strong equity market performance in January is not, as used to be believed in days gone by, a reliable forerunner of a good year ahead for the stock market, which is a pity as 2013 has certainly got off to a roaring start, with both the S&P 500 and the world index up by 5.0%, and the main Japanese indices up by nearly twice that amount.  After its lacklustre performance in 2012 the UK equity market produced an impressive 6.4% and China, a dark horse favourite for top performing stock market, a tad more.  However, as this useful corrective note from Soc Gen’s top-rated resident quant Andrew Lapthorne makes clear, there are some curious features of the markets’ generally impressive performance that give cause to doubt quite how enduring this rally will in practice prove to be.

Firstly debt issuance by companies is riding high and a large chunk of this debt is being used to buy back shares. This creates a virtuous circle, where increasing debt issuance supports share prices, pushing down implied leverage and volatility at the same time, which in turn supports ever cheaper credit for the corporate. So, once again, with one of the key marginal buyers of equities the corporate, using capital raised in the debt market means that, as ever, the fate of the corporate bond and equity market are intertwined and as such last week\’s weakness in the high yield bond market is worth keeping tabs on. Read the rest of this entry »

Hold on to your hats in Japan

The dramatic upwards move in the Japanese equity market since the autumn has plenty further to go, according to Jonathan Ruffer, the founder of the private client fund management group Ruffer LLP, one of the professionals whose latest thinking I (and many others) like to follow closely.  Ruffer as a firm has held an overweight position in Japan for quite a long time, and now stands ready to be vindicated if Japan’s new reflation policy takes hold, as the markets now seem to be assuming. Writing in his latest quarterly review, he comments as follows:

We hold roughly half of portfolios in equities, in the UK, Europe, US and Asia, but the largest geographic position is in Japan. This market was broadly flat when we last wrote to you, although we had made good money in financial and property stocks. In the last quarter these and other holdings surged further, providing a strong finish to a dull year. The rationale in Japan remains intact; it is the warrant on world economic growth, and so more of the same in terms of monetary stimulus should favour Japan without the rest of the world’s downside. The stability of Japan, its lack of overcapacity, and the absence of financial or labour fragilities, give some protection, and afford it the ability to generate a self-sustaining economic recovery. The low expectations built into the possibility of a Japanese economic recovery provide the opportunity for further sharp market rises. The major obstacle to a more bullish backcloth has disappeared with the appointment of Abe as Prime Minister, and the forthcoming retirement of Shirikawa as Governor of the Bank of Japan. In this new world, the investment danger for foreigners is a weak yen (we have been fully hedged), but this is a benefit to the equity market. Read the rest of this entry »

Written by Jonathan Davis

January 21, 2013 at 3:33 PM

Fools rush in while wise men take their time?

The New Year has started well, with plenty of evidence that professional investors are continuing to rediscover their appetite for risk assets, with the price of equities, corporate bonds and high yield debt all heading higher. The charts for leading equity indices, including the S&P 500 and the FTSE All-Share, have been trending higher ever since Mario Draghi, the head of the European Central Bank, announced last summer his intention to “do whatever it takes” to prevent the eurozone from falling apart. He has every reason to be pleased with the response to his intervention, which to date has been effectively cost-free. Would it were always so easy! European stock markets, having been priced for disaster before, have led the way up as fears of the euro’s fragmentation recede. Volatility, as measured by the VIX, has meanwhile fallen to multi-year low levels. Read the rest of this entry »

The risk of a short circuit in markets

Richard Burns, until recently the senior partner at Baillie Gifford, is now chairman of a range of the firm’s investment trusts, including Mid Wynd International, a special situations fund that holds positions in interesting companies that are too small to make a difference to its flagship funds. This is his most recent take on the investment environment, taken from the trust’s annual report. With the Eurozone crisis continuing to cast a shadow over events, and equity markets not obviously cheap, cautious and pragmatic investors (a type much in evidence in Edinburgh) are mostly marking time for now.

Repeated central bank stimuli have managed to contain, for now, what would otherwise have been a combination of Western debt deflation and deep recession. These interventions buy time, but not an indefinite amount. Policy making in the afflicted parts of the Western world appears to be running up against the laws of diminishing returns. Underlying sovereign balance sheets are deteriorating further meantime. What has happened is akin to stripping insulation from the bare economic wire – governments and central banks are that insulation. As time goes on, and in the absence of a more potent recovery, the risk of short-circuit increases.

Read the rest of this entry »

Written by Jonathan Davis

August 30, 2012 at 9:04 AM

An illusion of safety in bonds

Bruce Stout, the manager of Murray International investment trust, is another fund manager whose conservatism and preference for defensive high yielding equities has rewarded his shareholders well over the past few years. Earlier this year I heard him tell an investment trust conference that the most positive thing to be said about financial markets was they were becoming more realistic about the prospects for an early resumption of growth.

He sees little prospect however of any immediate improvement in the macro environment. These are his most recent comments on the markets, as reported by Citywire:

Recent respite in financial markets must be viewed with great scepticism. At the current time, when transparency is low, when harsh deflationary economic conditions are new to policymakers steeped in the past, and when the political establishment is clearly willing to indulge in perpetual bailouts regardless of the consequences, this is no time to let hopeful expectations cloud reality. We remain very cautious, defensively positioned and focused on capital preservation.

Read the rest of this entry »

Written by Jonathan Davis

August 27, 2012 at 5:20 PM

Ruffer: the right question to ask

The estimable and splendidly ideosyncratic private client fund manager Jonathan Ruffer, whom I profiled a couple of years ago in The Spectator, has some thoughtful points on the prospects for Europe in his most recent monthly investment review. Here is a short extract, in which he points to the underlying frailty of the European project, about whose future he is not optimistic:

The Treaty of Rome in 1957 was a great moment for the peacemakers, but now its architects are dead, as are pretty much all those who felt the visceral despair in the darkness of the late 1940s. That hope has been replaced with a sort of Communism: power divorced from economics. Just as Russia could not keep control when the figures didn’t add up, nor can Europe. It is only a question of time. So, when does it all end? I think it is a mistake to try and guess. Observers of 1980s Russia fell into two categories: those who thought things would continue as they were forever, and those who could see the pressure, the inconsistencies, and imagined that the crisis would strike a week on Thursday. Nevertheless, it is striking on my return to find how far the status quo has shifted in Europe since March. It’s the same tune, to be sure, but the violins have been replaced by cellos.

Read the rest of this entry »

Written by Jonathan Davis

August 20, 2012 at 4:39 PM

Why quality stocks pay off

It is no accident that some of the best performing fund managers of the last few years have been those who have stuck to investing in powerful global equities with a consistent history of profitability and sustainable earnings and dividends. In the UK those who fall into this camp include Neil Woodford at Invesco Pereptual, Nick Train of Lindsell Train, Sebastian Lyon at Troy Asset Management (mentioned in my last post) and Terry Smith, whose equity funds solely buy and hold this kind of high return on equity stock. It is also of course at the root of Warren Buffett’s long success as an equity investor.

But why do so-called quality equities (defined as stocks which have low leverage, high returns on equity and consistent earnings) perform so well, yet are so regularly overlooked by the majority of investors in favour of more speculative growth stories? A recent research note from Jeremy Grantham’s team at GMO uses long run US data to highlight the persistently superior performance of quality stocks and their particular attractions in today’s binary (“risk on, risk off”) market conditions. The primary driver behind this superior performance is the ability of these companies to preserve and grow capital, not to lose or squander it as many do, either through incompetence or normal competitive pressures.

Here are a couple of short extracts from the GMO research paper:

True competitive equilibrium is a rarity in the global economy. Instead, we find persistent winners and persistent losers. The competitive paradigm says that highly profitable activities attract capital, and that capital flees those with low profits. This is the market mechanism behind mean reversion, which is supposed to close the profitability gap. In reality, certain companies earn persistently high returns on equity. Superior returns are delivered to investors in the form of dividends, stock buybacks, and accretive growth.

Read the rest of this entry »

Written by Jonathan Davis

August 18, 2012 at 12:17 PM

An invidious choice

I find it hard to disagree with these comments from Sebastian Lyon, the CEO of Troy Asset Management, writing in the annual report of Personal Assets, the investment trust to which he and his colleagues now act as Investment Adviser, following the death of Ian Rushbrook four years ago.

The secular bear market in UK and US equities is now in its thirteenth year. How much longer must we wait until we can again be fully invested (or even geared!) and reap the double-digit returns we long for? Ask the policy makers! Stocks would be considerably lower were central banks not keeping stock prices artificially high by means of zero interest rates and quantitative easing. Despite these interferences, stock markets have gone sideways during the past year. Savers have not been rewarded for taking risk and hence our cautious strategy has paid off, for now, although we are likely to lag short term rises in the market should further monetary interventions be forthcoming.

Politicians in Europe are confronted with the invidious choice between severe austerity, which is likely to lead to periodic recessions and declining tax revenues, or incautious borrowing in the hope of buying growth. Both approaches will eventually force governments to pay higher rates of interest on debts. The maths do not stack up. No wonder governments are looking to extricate themselves from an intractable problem by leaning on central bankers to pull their inflationary strings. But our greatest concern is that the European challenges that have dogged markets since early 2010 are merely the dress rehearsal for the main event – a US fiscal crisis. While the UK and Europe have at least tried to tame their budget deficits, the United States has pushed ever harder on the fiscal accelerator. Stock markets swooned last August when they got a shock preview of what might happen should the brakes be applied. Following the public disagreement in Washington over increasing the public debt ceiling, the Dow Jones Industrials Index fell 13% in seven trading days. Read the rest of this entry »

Written by Jonathan Davis

August 16, 2012 at 7:56 PM

New Year hopes

My suspicions back in the autumn that a market rally was on the way have, I am happy to say, been borne our by events. Not for the first time, the peak of rhetorical despair – this time about the dire outlook for the world economy should the Eurozone crisis not be resolved – has turned out to be the moment to turn bullish. The rally since the failure of the Cannes summit has been impressive.

The MSCI world index is up by more than 20 per cent since its October low and has risen for seven straight weeks in a row, something that has not happened since the spring of 2009, according to the equity strategists at Societe Generale. Equity markets have made an even stronger start in 2012, with January producing one of its best monthly returns for many years. Contrarian sentiment indicators, such as the venerable Investors Intelligence survey of investment advisors in the United States, once again proved invaluable in identifying a turning point back in the autumn.

Read the rest of this entry »

Patience the number one requirement

It is more than 15 years since I first trawled up to Edinburgh to meet Ian Rushbrook, the iconclastic onetime Ivory & Sime partner who took over the running of the near-dormant Personal Assets Trust in 1990 and soon turned it into one of the most successful capital preservation vehicles for private investors there is. Ian featured in my book Money Makers (first published in 1998, soon to be re-issued in a new edition).  A smart young fund manager called Sebastian Lyon was one of those who read my book and liking what he read, later made a pilgrimage to Ian’s den behind Charlotte Square to learn more about the business of managing money.

Now, several years on, as CEO of Troy Asset Management, a fund management business that originated as the guardian of  Weinstock family money, he also acts as Investment Adviser to Personal Assets, following Ian’s untimely death three years ago. The trust has since gone from strength to strength, delivering NAV growth of 51.7% in the three years to the end of November 2011, outperforming the FTSE All-Share by a useful margin as a result. With shareholders funds of more than £400 million, and a succesful no-discount policy in place, shares in the investment trust have now reached the giddy heights of being included in the FTSE 250 index. Read the rest of this entry »

Written by Jonathan Davis

December 20, 2011 at 4:18 PM

A $100 billion dollar warning

There is an interesting profile in the latest issue of the New Yorker about Ray Dalio, the founder of Bridgewater Associates, one of the world most successful macro hedge fund businesses, in the tradition of George Soros and Julian Robertson. Mr Soros has meanwhile just announced that he is closing his Quantum Endowment Fund to outside investors, ostensibly because of the impact of new regulations, and will in future run it solely as a family office.

Bridgewater Associates has around $100 billion under mangement and both anticipated and weathered the credit crisis with some success. Unlike the Quantum Fund, which until it changed its objective in 2000 from aggressive return-sekking to wealth preservation was famous for its big concentrated bets, the firm’s Pure Alpha fund is up around 10% this year while most hedge funds have struggled to make any money at all. Its style is to make a wide range of bets, many of them paired – buying platinum or selling silver, for example – in an effort to do what hedge funds were originally designed to do, which is to reduce correlation to the market’s overall movement. Dalio’s speciality is making calls on bond and currency markets.

While a lot of the New Yorker article is devoted to the unusual way in which Bridgewater Associates is run, it also contains Dalio’s judgment on current market conditions. “We are still in a deleveraging period” he says, and “we will be in a deleveraging period for ten years or more”. The article continues:

Dalio believes that some heavily indebted countries, including the United States, will eventually opt for printing money as a way to deal with their debts, which will lead to a collapse in their currency and in their bond markets. “There hasn’t been a case in history where they haven’t eventually printed money and devalued their currency,” he said.

Other developed countries, particularly those tied to the euro and thus to the European Central Bank, don’t have the option of printing money and are destined to undergo “classic depressions,” Dalio said. The recent deal to avoid an immediate debt default by Greece didn’t alter his pessimistic view. “People concentrate on the particular thing of the moment, and they forget the larger underlying forces,” he said. “That’s what got us into the debt crisis. It’s just today, today.”‘

But he also makes the obvious point that timing is the key to getting these big calls right. “I think late 2012 or early 2013 is going to be another very difficult period” is his reported view. That has always been my expectation too, but recent events – the muted response to the latest Greek bailout plan and the ongoing stalemate over the US debt ceiling (which Soros dismissed last week as “theatre”) -  may of course be bringing the point of crisis nearer.

That may of course also be one reason why the Quantum Fund is currently reported to be sitting with 75% of its assets in cash. However if the debt deal is done, which still looks the more likely outcome, there could be a decent rally in risk assets over the last few months of the year.

Written by Jonathan Davis

July 28, 2011 at 12:31 PM

Mixed messages from the markets

Two contrasting views today that neatly sum up the current rather feverish market dynamics. This link summarises Deutsche Bank’s view that the worst case outcome the Eurozone crisis could be a 35% fall in global stock markets. And here, on the other hand, is the latest weekly view from fund managers Artemis, citing six reasons to be cheerful.

Of course the whole world could still go to blazes in debt’s handcart. It might well. But on balance, we prefer to remember that the FTSE 100 is (just) above its level as 2011 began. And that’s despite, it’s worth remembering, Japan’s tsunami, war in Libya, Arabian unrest, nemesis in Greece and the end of American QE.

Corporate health. Sure, there’s more bad news to come, we reckon, for most UK retailers. But there’s still much less credit risk in most companies than there is in governments. Take a stock like Hunting (oilfield services). It has cash of £300 million, a third of its market cap. Or publisher Reed. It’s priced at 11.5x, has a 4% yield, diversified earnings and improving margins. Japan’s NTT Docomo (mobile telecoms, 3.8% yield) has more cash than it knows what to do with.

M&A. Weaker sterling makes UK assets even more attractive to foreign (war) chests. Negative real interest rates in the west. These force investors, reluctantly or otherwise, into (high yielding) equities. Pessimism. It’s pronounced. If history has any predictive power, the gloom suggests this is a ‘buying signal’. Emerging markets. China seems to be Goldilockian. The prospects are patent, and the growth is good. The best western companies will continue to make their money there, not here. QE2. Its positive effects will take time, but will benefit the US economy.

What all this confirms to me is that the market, as always, has great difficulty in finding a level when there is a wide range of potential outcomes, some of them extreme. The Eurozone crisis is a good case in point.  The way the crisis has evolved is as much an indictment of the inadequate way that Europe’s political class have responded to the new threat of sovereign debt default as it is about the underlying gravity of the potential problem.

Meanwhile, the interesting part about Mr Bernanke’s recent testimony, to my mind, is the reaffirmation that his whole approach to running the Federal Reserve is rooted in his paramount desire to avoid deflation at any cost.  if he does restart a further round of printing money (quantitative easing), it will be because the Fed sees a real risk of deflation once more.

The odds are still against a worst case outcome at this point, but there is no denying that it is a possibility, and that is what sends risk-averse investors scuttling for protection. In these circumstances remember all those stories about a big turn in sentiment towards gold and other commodities in the early part of the year? Gold’s continued ascent to new highs tells a different story.

Written by Jonathan Davis

July 15, 2011 at 2:00 PM

The conundrum of cash

The current phase of “financial repression” (negative real interest rates that penalise the virtuous while inflation erodes the liabilities of imprudent borrowers)  is creating difficult issues for financial advisers and wealth management firms, many of whom have no experience of living through such an unusual environment. Central to that is the issue of what to do with cash at a time of market uncertainty, when conventional valuation measures are being distorted by the impact which quantitative easing and other monetary policy measures are having on government and corporate bond yields.

Look for example at this interesting report on Trustnet about the way that one of Cazenove Capital’s fund managers is preserving cash in his cautious managed fund, which has a benchmark of beating the CPE by 4% per annum.

Marcus Brookes has defended his 20 per cent cash position in the £707m Cazenove Multi Manager Diversity fund, even though he acknowledges that the UK’s high inflationary environment is set to endure. With the consumer price index (CPI) at 4.5 per cent and base rates at a historic low, cash is losing a substantial percentage of its real value by sitting in the bank. However, Brookes says he has no plans to cut his exposure to money markets any time soon. “Although there is a lot of talk about inflation at the moment, we are even more worried about the government bond market, particularly as a long-term bet,” he explained.

“The fund maintains a third of its assets in equities, a third in either fixed interest or cash, and a third in alternatives, no matter the market environment. We think the potential capital losses in government debt are so high that we’d rather hold cash for the time being.” Although Brookes could invest this 20 per cent in corporate debt, he says this would go against the fund’s risk profile. According to Financial Express data, Cazenove Multi Manager Diversity is one of the least-volatile funds in the IMA Cautious Managed sector over a five-year period.

“We could move into investment grade and high yield corporate debt, but at this point of the economic cycle we think this would increase the risk of the fund,” he said. “A lot of people are saying that the end of QE2 has been priced into the market but we are not so sure. The data coming out of the US has been poor and we anticipate another soft patch. The cash position also keeps our options open when certain areas of the market get cheaper,” he added.

Being prepared to sit on holdings of cash when the market appears to be offering few opportunities  is, as I argued in my most recent FT column, one of the hallmarks of the most successful money managers. The two advantages are: (1) avoiding drawdown during market falls and (2) having the firepower to take advantage of the valuation anomalies that always appear when the market slumps.

To do so requires good judgement and a lot of courage however, since such a stance is easy to criticise if markets remain buoyant.  To do so in an environment where cash is providing negative real returns - and the opportunity cost is therefore higher than normal – makes it an even braver thing for a fund manager or financial adviser to do. However that does not mean it is wrong.

Written by Jonathan Davis

June 15, 2011 at 2:02 PM

Consistency In fund performance

According to the multi-manager team at Thames River Capital, only 16 out of the 1188 funds in the 12 main UK sectors have delivered top quartile returns in all three of the last three fiscal years (March to March). Only 102 of the funds, or less than 10% of the total, managed to achieve even above average returns in all three years. In many sectors, including all the bond funds, not one fund managed to be top quartile in each of the three years. Shock horror? No, this lack of consistency should come as no surprise, since most funds tend to follow a consistent style and thus their relative performance invariably changes when the market itself changes direction, as it notably did in March 2009. Read the rest of this entry »

Written by Jonathan Davis

May 28, 2011 at 4:54 PM