Looking back at 2017

Performance 1 January – 31 December 2017
	Defensive Portfolio	Cautious Risk 4 Portfolio	Cautious Risk 5 Portfolio	Balanced Portfolio	Moderately Adventurous Portfolio	Adventurous Portfolio
Portfolio	7.83%	10.43%	11.81%	18.24%	20.16%	21.89%
Benchmark	5.96%	7.28%	7.76%	10.17%	11.59%	12.79%

You should note that past performance is not a reliable indicator of future returns and the value of your investments can fall as well as rise. The total return reflects performance without sales charges or the effects of taxation, but is adjusted to reflect all on-going fund expenses and assumes reinvestment of dividends and capital gains. If adjusted for sales charges and the effects of taxation, the performance quoted would be reduced.

It is really pleasing to be able to start the introduction to this year’s annual review by reporting that every portfolio has created gains in 2017, and the returns for those of higher risk have been both sizeable and comfortably outperforming their benchmarks.

But first a confession

At Christmas lunch this year where the retired (so former) Mrs Berry was guest of honour, the girls reminded me of something I used to do.

Angela would be preparing a big roast on a Sunday having invited family and friends, the girls then small would be helping and I’d be nowhere to be found (probably watching the football). Just as people would be due to arrive I’d magically materialise, make the gravy, cut the meat and garner many approving nods for having been such a full-on participant in the whole process.

It struck me that this story is somewhat similar now at LWM.

Nicola and George work incredibly hard with great skill, knowledge and attention to detail delivering a tremendous service to clients.

They are the primary reasons for our success, so please bear this in mind therefore when reading; I really am just the gravy guy.

2017 – the year that nothing bad mattered?

George will go into detail about the performance of the main indexes and funds, but the headline really is that everything equity-related in 2017 pretty much rose in value and several markets had stellar years.

This was not however, the most interesting thing about the year (although definitely the most lucrative).

2017 was rather unusual in being almost completely without market volatility.

That’s to say markets just ticked up higher, with no major pullbacks, which usually occurs even in good years.

But this was somewhat confounding; it’s not as if scary things didn’t happen.

“The Donald” kept making bizarre and highly inflammatory statements, where his relationship to fact and reality became ever more estranged.

His actions were not obviously sage or cerebral either.

This being exemplified by his firing of FBI chief James Comey, for apparently not taking his hint to stop investigating General Flynn; a member of his cabinet who was accused of colluding with Russia to help Trump’s election campaign, and who has subsequently (it appears) cut a deal to testify to such.

A Presidential impeachment in 2018?

North Korea fired missiles over Japan and threatened nuclear war.

Donald presidentially defused the situation by calling their leader fat (and ‘Rocket Man’)!

The Republicans failed to pass healthcare reform; even on the basis that the savings they’d make from lumping 30 million people back into having no healthcare coverage would allow them to cut taxes which was potentially bad for markets, but not bad that it didn’t happen if you get my meaning.

The Brexit settlement cost for the U.K. was confirmed at around £80 Billion.

One was certainly left wondering about the £350 million saving from leaving, predicted by Brexiteers and promised to put back into the NHS??

They were a tad off the mark with that one but everything else was absolutely accurate.

So bad stuff happened but markets didn’t choose to care.

It’s emotions that matter

“In the short run, the market is a voting machine but in the long run it is a weighing machine.” (Warren Buffett)

My apologies to long time readers as this bit is a retread of something we’ve been repeatedly saying since we started, but it’s pretty much fundamental to understanding market behaviour.

Over longer time periods, (multiple years) markets are highly efficient at pricing assets correctly (the weighing machine) because they use facts not feelings.

Over short periods, emotions can outweigh facts which is when they become inefficient at pricing assets.

Hence the second Buffett quote

“Be fearful when others are greedy and greedy when others are fearful.”

For those who were invested in markets between 2009-16 and who endured multiple hysterical market reactions and plunging values on rumours of this or fears about that. Well, 2017 was a lovely positive payback for your fortitude in staying the course.

Occasionally like in 07/8 with the Financial crisis something is genuinely and deeply concerning. In the main however, markets are overemotional in short periods and this inefficiency is where real money can be made, because of the fire-damaged prices offered on pristine goods. On average however, over longer periods the price markets offer on assets is not going to be cheap.

So, the conclusion to 2017 and the terrific returns enjoyed, is to see it in farming terms as a year of bumper harvests. The seeds to this however for the most successful investors were sown some years back, when fears and anxieties depressed returns but offered compelling prices; those were the years of planting.

Why were markets on Prozac?

There were some decent reasons for markets having such a sanguine attitude.

1. Global Company profits rose strongly quarter on quarter as did projections

2. Europe didn’t implode with benign results in all the potentially contentious elections

3. China ceased to be a worry

4. The US Dollar fell which was good for commodity prices, which also rose strongly as global activity increased

5. Emerging markets found firmer ground and concerns over the negative effects of rapidly rising US interest rates receded

6. Brexit negotiations although stilted, did not give the impression of either side being on a war footing

So how does 2018 look?

It is usually sensible and prudent after such a strong year to remind oneself that the average return on equities is around 5% above the yield on cash, and that returns above this level are potentially profits borrowed from the future.

Or to put it in less verbose terms.

“It isn’t happening again bud”

However!!

2018 sets up as a unique year.

1. The US has just passed truly massive corporate tax reforms; dropping the rate companies pay from 35% to 21%. This is properly transformative but more so for the US mid and small cap companies who derive most or all of their profits in the US. The big multi-nationals have significant percentages of earnings taxed in countries with rates similar to the new US rate, so their aggregate percentage was previously more around the mid 20%’s

2. The second part of the US tax reform is to allow repatriation of cash held overseas by US Companies. The new rate will come down from 35% to around 15%. The amounts held offshore are staggering. The estimate of the total for all US companies is in excess of $3 Trillion with Apple alone having over $250 Billion that could return. The question therefore is where does this money go when it returns? Whatever answers and whatever percentages are conjectured, the net effect will in all likelihood increase asset price values

3. The world economy is growing at 3% plus with ultra-low interest rates, and no likelihood of them increasing aggressively. This has never been seen before

4. There is little sign of any inflation, again in such a strong economic environment and a world awash with liquidity screaming for yield on cash this has never been seen either

So, 2018 has a lot going for it in theory, and many are predicting another year of strong returns.

Our own view is that the reasons as above look compelling, but as the estimable Mr Buffett has written.

“You pay a very high price in the stock market for a cheery consensus.”

 

Note: This is written in a personal capacity and reflects the view of the author. It does not necessarily reflect the view of LWM Consultants. The post has been checked and approved to ensure that it is both accurate and not misleading. However, this is a blog and the reader should accept that by its very nature many of the points are subjective and opinions of the author. Individuals wishing to buy any product or service as a result 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 as a result 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.