If 2020 was a year turned upside down, then we all entered 2022 hoping for a steady return to normality. Like a shaken snow globe settling.

But no, we pretty much started with Delta and ended with Omicron.

If you polled people on their least favourite alphabet, then it must be Greek.

So, we should institute change; like hurricanes, future variants should be called not by letters but peoples’ names which I think has merit. All things being equal I’d definitely feel much less threatened if the news reported:

“Tarquin continues to rise in the South and has now overtaken Basil”

Before I crack on, it’s important to recognise the immense efforts of George and Nicola.

George is a marvel, a machine. He expertly researches investment options, runs the office, and keeps us compliant. We are blessed to have him.

Nicola, as long-term clients will know, is a massive upgrade on the previous bloke. She cares deeply about everyone. Her kindness, consideration and hard work allied to a deep knowledge of financial planning is a killer combo.

Changing it up

We are doing the review differently this year.

Below are the results as normal and then George has written a review of three funds which have not been best performers in ‘21. The portfolios are a blend of all the main asset classes with the best funds we can find representing each. In any one year, not all sectors or indexes will have strong returns. We know this is likely and accept it because we (or anyone else) can’t predict ahead of time what will happen. But if a fund does poorly, we certainly want to understand why and confirm that our belief in the long-term prospects for outperformance remains strong.

End of year review


 12-months3 years5 yearsSince inception *
Cautious Portfolio10.25%38.26%45.50%236.47%
Cautious Positive Impact Portfolio9.10%N/AN/A23.47%
Balanced Portfolio11.14%46.46%61.07%296.79%
Balanced Positive Impact Portfolio11.12%53.45%68.40%120.06%
Moderately Adventurous Portfolio10.46%51.78%68.24%322.68%
Adventurous Portfolio8.24%52.93%71.51%338.80%
Adventurous Positive Impact Portfolio12.95%N/AN/A31.00%

Note: The portfolios were launched on 1 January 2009 except for: Balanced Positive Impact Portfolio 1 August 2014, Cautious Positive Impact Portfolio 1 July 2020 and Adventurous Positive Impact Portfolio 1 July 2020.

Past performance is no guide future performance and investments can fall as well as rise.

George dives deep into funds

During 2021 we completed over 130 fund manager meetings, and this is a really important aspect of the work we do on a daily basis when managing the portfolios.

The three funds we are looking at are: Morgan Stanley Asia Opportunities Fund, Baillie Gifford Global Discovery Fund and Carmignac Emerging Markets Fund.

Morgan Stanley Asia Opportunities Fund

This strategy has an excellent long-term track record, and in 2020 was up +46.80%, in 2021 the return was -17.17%.

In quarter 1 2021 the market favoured low quality cyclical value stocks and there was a sell-off in growth (particularly tech) which this fund is positioned towards. The fund also favours China with around 50% of the fund allocated to this region and is a concentrated portfolio of just 35 names (currently).

The strategy had exposure to Tal Education, which was a large detractor to performance and has since been sold. As of 26 July, the strategy held no US listed China education companies.

Meituan is a Chinese shopping platform which received a very public fine (large in number but small for them) for ‘monopolistic practices’ as part of Beijing’s crackdown on big tech. This is the second largest holding for the fund. Although this has been a detractor in performance, they continue to see growth potential, and with its dominance in food delivery it has a strong moat, and the fine was seen as a positive action. The fund is also engaging with the company on ESG (environmental, social and governance) areas on issues such as delivery driver welfare and use of single plastics. The current weighting in the fund is 6.75%.

Another detractor is Coupang which is South Korea’s biggest e-commerce company and offers lightning-fast delivery speeds making it hard for international companies to compete with them. This remains high quality but is trading at a significant discount. The current weighting in the fund is 4.85%.

The team have faced challenging periods in the past and historically this is where they have found their best ideas. In 2012 they had prolonged underperformance in the Global Opportunities Fund (which this fund spun out of) and was a time when they found their 4 best performing ideas (for the next 9 years). During 2021, they added their first industrial name (Grab), and first material name (Shree Cement) as well as adding to their highest conviction names.

They have made no structural changes to the fund other than no longer holding Chinese Education stocks listed in the US. They focus on long term investment opportunities and ignore the noise. An example of this is KE Holdings which is a leading property agency in China. The opportunities for the business to become a one-stop platform for key property related services is massive.

In summary, the team know it has been a painful year, much driven by a dramatic overreaction to other companies’ issues which has provided opportunities, not just in China but across the entire investment spectrum.

FP Carmignac Emerging Markets Fund

This strategy has an excellent long-term track record, and in 2020 was up +63.02%, in 2021 the return was -13.92%.

This has a fairly large exposure to China at 35%, and again is a concentrated portfolio of just 46 names (currently). This is a growth strategy so like the Morgan Stanley fund, suffered from the cyclical value rally to which they have no exposure. Chinese stocks also suffered from the crackdown in education, indiscriminate sell-off due to concerns on Evergrande/Real Estate and delisting from US markets.

Some of the best performing markets this year were India, Russia and Saudi Arabia. They have no exposure to Saudi Arabia, and in India and Russia much of the rebound was focused on low quality cyclical stocks whereas they are positioned towards long-term sustainable growth sectors.

In China specifically they favour growth sectors with a focus on new economy (consumption upgrade, healthcare, tech innovation, new energies). Not all parts of the Chinese market have performed badly; energy, utilities, industrials and materials are all up but these are not areas they invest in. The top five detractors for the fund are all Chinese stocks.

These are all quality companies that got hurt in the selloff that impacted all Chinese markets in an indiscriminate manner. They have added to weighting on 4 out of 5 of these companies as they are trading on low multiples and expect a strong rebound in 2022; Vipshop Holdings Ltd, Ehang Holdings Ltd, Miniso Group and Joyy Inc. The only exception is New Oriental Education as the regulation on tutoring companies changed their initial investment case and growth forecasts, and therefore this is being reviewed.

Areas that have worked well include Asian eCommerce and Tech (Sea, Naver, Kuaishou Technology), Healthcare (Wuxi Biologics, Zhifei, IHH Healthcare) and Latin American Banks (Grupo Banorte).

During this period, they have been adding to some of their largest convictions like JOYY, Yandex, Vipsop as well as adding Baidu, ANTA Sports and TSMC.

To summarise, in the short term they feel there will be continued volatility within emerging markets, but they are positive about the outlook for China with most of the regulatory changes behind them, attractive valuations and upcoming monetary easing and support measures. They also see emerging countries having healthier fundamentals and are less vulnerable than in the past.

The portfolio is skewed towards Asia (79%) where they see the better growth and economic governance with China the highest conviction followed by South Korea and India. This is also the area they see as offering the largest pool of innovative tech/internet companies.

And it is worth highlighting that the strategy is structured around six major socially responsible investment themes – digitalisation, tech innovation, green energy and mobility, healthcare, and medical innovation, improving living stands and consumption upgrade and financial inclusion. These are all future growth areas.

Baillie Gifford Global Discovery Fund

This strategy has an excellent long-term track record, and in 2020 was up +76.80%, in 2021 the return was -20.69%.

The investment philosophy of the fund focuses on the team taking a long-term view (of at least five years) on the prospects of the companies they invest in. This means they focus on what drives the share price returns, which in their view are revenue and earnings growth. The strategy will also seek out early stage, disruptive, immature businesses which they believe will be the big winners of the future and therefore the strategy is skewed towards the parts of the economy with the greatest change and disruption.

The holdings within this can be significantly affected by the sentiment of other investors and external news events especially as they are at early-stage development. The fund currently has around 109 holdings to reduce this risk, but it is not immune to periods of underperformance.

Concerns over inflation have impacted some of the holdings as future earnings are more sensitive to interest rates. However, the team are looking out over a 5–10-year horizon and they believe the longer-term structural forces of technology and innovation will remain.

Investor sentiment has shifted away from ‘technology’ stocks which performed well last year to those benefiting from the re-opening trade. Some of the main detractors in performance this year include Ocado, Appian, Teladoc and MarketAxess. All these operationally continue to perform well but the market is questioning whether the rapid growth can continue.

The team believe these companies are addressing problems in massive end-markets (Ocado grocery, Teladoc virtual medicine etc.) and there remains a multiyear growth runway ahead of each. They are confident that the pandemic will not prove a short-term tailwind, but that many of the customers forced into using these services will continue to do so, and that their position relative to competitors has improved. 

There have been negative operational developments at certain holdings, most obviously Zillow and Chegg. With both holdings they have taken no immediate action and they are meeting with management to get their perspective on recent events and views about future growth. 

In summary like Morgan Stanley and Carmignac these are long term investors and therefore there will be periods of short-term volatility. They haven’t made any significant repositioning and believe they have a portfolio of unique, high potential businesses which can deliver strong returns over the targeted, long-term period. The team added that they continue to uncover a stream of interesting, underappreciated businesses which includes hydrogen’s role in the emerging transition (ITM Power) and genome sequencing (Oxford Nanopore).

2021 year in review


The main economic talking point of the year has been the rapidly rising inflation rate. Not the most exciting topic unless you’re an economics nerd but it’s central to the future trajectory of interest rates and so investment returns.

Inflation is a tricky wee beastie to understand. Not in abstract but in real time why it occurs and more importantly why it doesn’t. The huge inflation spike in the 1970’s above 10% pa at times has never been explained. Lots of theories but no proven unified cause and effect.

Source: Ritholtzwealth.com

There are two main distinct types of inflation.

 ‘wage push’ and ‘cost pull’

The cost pull references rising goods pricing, too much money chases inadequate supplies of goods or services. The market, if efficient, will quickly rebalance to equilibrium by producing more of what is wanted.

This can work in reverse where too little money is chasing an oversupply causing a fall in prices, which is deflation.

Also, goods can be produced more efficiently and at lower cost meaning their purchase price reduces (think TVs, white goods, computers etc) which gives another form of deflation prevalent 2010-20.

Wage pull is, unsurprisingly, rising annual wage rates which will be pulled higher if goods and services increase in price to maintain the real value of the wage. This is exacerbated if workers are in short supply as they have leverage over employers.

From 2000 to 2020 wages, for lower earners barely kept pace with inflation.

So, the situation in 2021 

  1. Worker shortage
  2. Massive increases in demand for goods and services
  3. Inefficient markets post Covid (plus BREXIT in the U.K.) causing goods to be scarce.

Prices therefore were higher, meaning workers wanted commensurate pay rises.

This, unchecked, theoretically is a 1970s style inflation spiral.

So, let’s look at the facts.

  1. Since 1920 inflation has averaged 3% annually
  2. In the 1970s inflation averaged 7% annually
  3. Inflation rate in 2010 with huge stimulus in the system post financial crisis 1.6%
  4. Inflation average 2010-20 2.6%
  5. 2010-20 Goods prices deflated (got cheaper)
  6. The current inflation is mostly in goods not services
  7. The majority of current wage inflation is for lower 30% of earners
  8. No significant wage inflation in top 25% of earners

Source: Ritholtzwealth.com

So, what does this tell us?

  1. Goods prices spiked due to shortages
  2. The difference is not central bank stimulus because they did this in 2009-12 and no inflation resulted
  3. The difference then, was people felt poorer. During COVID people were shut in so had free time and no social life to spend money on. Furlough funds were handed out, wages then increased, asset prices (house, shares, crypto, NFTs etc) have rocketed higher
  4. Interest rates are at near zero (cheap mortgage rates)
  5. Lower earners don’t all need to go back to the same job. Many just spent the last 16 months considering new options including being on Reddit, Twitter and Robinhood making money from buying Crypto coins, NFT’s and MEME stocks
  6. In the US, new company formations are running at the highest ever recorded rate. Many people have clearly used the Covid break to reassess and decide to pursue their own thing

Unlike the 1970s nobody should be scratching their heads about the causes of current inflation.

We had a pandemic, businesses shuttered, cancelled all their orders, sold inventory assuming a business nuclear winter was upon them and instead, shortly after demand exploded. It’s taking time now to sort out the consequences and for market efficiency to return.

It’s transitory!


In fact, for 2022 and beyond, the bigger long-term risk is deflation.

Firstly, in the short term, significant over ordering of goods in the last 6-9 months will create inventory overhangs and force many prices down in 2022.

Secondly and ongoing deflation was happening before Covid as technology made goods cheaper and better. This will speed up.

Thirdly on a personal level technology will increasingly change job markets profoundly. Do we have as examples the same number of human taxi drivers, lorry drivers, shop assistants, chefs, cleaners, or traffic wardens in 5-10 years’ time?

Machines programmed with AI are going to replace humans wherever possible.

They are cheaper, have no employment rights, do the job perfectly, take no holiday, don’t get sick and won’t try to unionise until they become sentient (see Terminator and Skynet for how that turns out).

Interest rates

In 2022 and beyond they are rising globally but the question is by how much? Fed Chair Powell confirmed in November rates would rise in the US next year, but the 10-year Treasury yield didn’t. The fixed interest market clearly believes that beyond the short-term spike in inflation and rates, the West will have more of a deflationary problem not inflation, so rates stay low.

Source: ASR Ltd

In 2021 bonds (fixed interest markets) had their worst performance since 1999. This was predictable and we said so in the last annual report. Likely the performance will be poor in 2022 as rates rise.

Source: Ritholtzwealth.com

Asset money

The inequality in wealth is growing fast as those who own hard assets are enjoying gains above normal. Asset money is making big money.

If you consider someone who held £1million in cash through 2021.

  1. Cash reduced in value by inflation -5% return: Loss of £50000
  2. Property on average plus 8-15% Gain: £80,000-£150,000
  3. Shares on average plus 10-25% Gain: £100,000-£250,000

So £1m in cash saw a potential difference in performance of minus £300,000 in 2021.

The inescapable conclusion that wealth protection will continue to compel people to buy hard assets over holding cash and this continues if real interest rates are negative.

Stock markets

Many fear stocks as an investment. Conflicted by the volatility in price which causes extreme discomfort, alongside the understanding that consistently they’re the best performing core asset class. Some see periods of strong gains as representing likely bubbles and times of weakness as validation of untrustworthiness. Recently they’ve read articles saying prices are ludicrously high and at the same time see people making serious gains.

Too often they finally succumb to FOMO buying at pretty much the top of a cycle. Markets then fall, they sell and vow never to invest again. So, let’s look at the reality of how stock gains are made. There are two ways.

  1. The stock value increases above the rate in company earnings (cause for concern)
  2. The value increases roughly in line with company earnings (no cause for concern)

The first way is called multiple expansion. It means on a price to earnings ratio the price rises faster than the earnings, so the PE expands. This is where the market doomsayers tend to focus when they evidence their reason for calling market bubbles. The most used metric is the CAPE or Shiller PE which both measure the current average stock multiple as an average of the last 10 years earnings divided by inflation.

Look they say, it’s exploded, the only higher periods were 1929 and 1999. Both were right before huge market crashes. All sounds logical and scary.

Source: Ritholtzwealth.com

Actually, not so today (but certainly was then).

The US market today has a very different construction from 20 years ago and night and day from 1929.

Source: Ritholtzwealth.com

  1. 2021 S&P 500 (500 biggest US companies) the top 5 names account for around 30% of the total value and around 40% of total profits; Amazon, Alphabet, Microsoft, Meta, and Apple
  2. The averaged profit growth rate of these five is around 20% per annum
  3. This means their profit growth over the last 10 years has been roughly 600% compound
  4. This has never been seen before. Large company growth should in theory slow down but for these 5 it hasn’t. These trees are growing to the sky
  5. Couple this with let’s say another 20 or 30 smaller but still significant companies whose profits are growing at 30-50% plus pa. Then factor in capital expenditure (business investment) on their annual accounts that does not show as profit even if it’s being funded from earnings. So, they have explosive profit growth but are showing lower profits as they fund expansion

Fabulous combination, superb investment opportunity but…If you apply the old metrics of how to judge markets, it makes them look crazy expensive.

(source – JP Morgan)

However, use the metric recommended by John Bogle who created Vanguard (Index tracker pioneer, not crazy growth investor looking to self-justify), he recommended that investors value the market as follows:

  1. Profit Growth
  2. Dividends
  3. Multiple expansion or contraction.

Since 2000 the S&P has averaged 14% growth:

Profits growth averaged10.6%
P/E expansion therefore1.1%

Source: S&P Global Market Intelligence

Think about that for a second. The market has seen the rise of the most profitable, fastest growing companies in history with fortress balance sheets and no debt and the P/E hardly increased?

That surely makes the market by comparison historically attractive not scarily expensive?

As we have said before, when you hear “this time is different” it usually pays to be highly sceptical but…it really does appear ‘this time is different’.

Demographics and the denominator

We listen to epic amounts of analysis from fund managers, investment houses and market commentators. George does the direct investment stuff which he passes on via his blog ‘Howay the Ladds’ and I’m the Podcast junkie.

The two most interesting theories I’ve heard this year are:


The price of stocks and housing will increase faster with positive demographics; this is the study of population structures. The average age of a population will dictate how in aggregate it behaves. The peak productivity and spending period for an individual being between 30 and 50. They buy houses, goods and save for retirement. The average age of the US populace is 31, which is positive for future demand in housing and stocks.

Source: Ritholtzwealth.com


The bottom half of a fraction is the denominator or what something is divided by. The economic theory relating to the money supply denominator is that inflation is prevalent and has been for 10 years but not where it was previously. Rapid inflation has affected asset prices not goods and services. And the cause of this inflation, the denominator, has been money printing. The percentage increase of money in circulation has closely tracked the rise in asset prices. This makes sense, it must go somewhere, and it’s been going into hard assets such as property, art, collectibles and stocks. Unless the money supply is going to shrink then this asset inflation keeps going. It further explains the sense of inequality felt by those who have few, if any, assets. Inflation in asset prices has made everything progressively less obtainable. They can’t get a foot on the ladder or must pay more to do so. They have felt inflation, but it’s not measured by CPI.

This is 21st century inflation. Too much money chasing not too few goods, but too few prime assets. The market can’t make more prime assets, equilibrium is not possible, so prices rise.

Source: Ritholtzwealth.com

And finally

  1. China – Their actions this year have been concerning. We think it makes no sense for them to dismantle what they have built, but we watch with heightened anxiety, especially regarding Taiwan
  2. Crypto. We wrote a blog in December laying out as far as we are allowed our thoughts. Would we invest in Alt coins? No. Beyond Bitcoin, Etherium and possibly Solana we can’t make sense of what’s going on
  3. Metaverse – It’s coming, and will be huge
  4. NFT’s – If you own a Cyber Punk or a Bored Yacht Club Ape then you’ve made a fortune.  We think very early NFT’s will have historical value, but the market will be saturated with product and values are therefore highly questionable
  5. COVID- Pfizer now make a pill. Game changer. Omicron is hugely infectious but less severe, exactly how previous pandemics burn out. We hope
  6. Tech bubble of 2020 bursting? Yes, already happened.

Peloton, Teladoc, Zoom (and many others), valuations more than halved in ‘21.

Source: Ritholtzwealth.com


This bit is important. A huge thanks to you for being a joy to work with.

We are fortunate to do something we enjoy with people we like.

We will give you our very best effort in ‘22 and look forward to seeing you.

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.