In “Howay the Ladds” this month we consider what we view as success. The key takeaways from the blog are:

  • We need to have time to build investments and deliver successful outcomes.
  • The average holding period of shares as of June 2020 is just 5.5 months.
  • Buying, and holding investments is not a bad strategy. It is not easy to predict the next big investment.
  • Selling early can have a detrimental effect on returns but the fear of missing out can cloud our judgment.
  • Expected returns over the next 10 – 15 years highlight China, Europe, Japan, Emerging Markets and Asia as potential winners.
  • Returns in 1 year can vary significantly.
  • Ultimately, success is what we view it as. When things don’t appear to be going as planned, that doesn’t necessarily signify failure.

View PDF version of blog.

June Spotlight

Football is something that I have very little interest in. However, I find it fascinating that there is no patience when it comes to managers. The average top-flight manager currently lasts two years and four days. However, if you take out Jurgen Klopp and Pep Guardiola, this drops to one year and 169 days.

The question is, what is success?

Below is a table of the ‘big six’ during the 2010’s:

The issue for fans is that it is not good enough to be in the top six. It is about winning and winning all the time. This means that fans and owners provide managers with little time to build a team and achieve success.

Some of the longest serving managers in recent years include:

Alex Ferguson – Manchester United 1986 – 2013

Dario Gradi – Crewe Alexandra 1983 – 2007

Arsene Wenger – Arsenal – 1996 – 2018

Eventually, even these times come to an end as the expectations for success are such that an average season is seen as poor.

Investing seems to be following the same trend. The data is based on the New York Stock Exchange.

The average holding period of shares as of June 2020 was 5.5 months. In the 1950s this was 8 years. The world has changed; we have so much data available to us and there is an argument that this is reflective of a changing society.

The idea is that not only can we find the next big investment, but we can also predict when to sell. We will get it right…..until we don’t.

The chart above demonstrates the dangers of investing. The famous investor Warren Buffett is an advocate of the “buy and hold” strategy. The table below shows how much holding £1,000 in 1986 could be worth in 2021.

During this time the value could have been higher or lower than the end point.

Looking at this a different way, the chart below shows 20-year annualised returns between 2002 – 2021.

We have read many times that when markets are racing away, Warren Buffett’s strategy doesn’t work, and yet when markets pull back everyone goes back to how good a strategy it is.

We have such a fear of missing out that if we are not in the top position, something must be wrong. Like football management, we have an increasingly short period of time to get it right and if we don’t then we are seen as failing.

Investing should be seen as “dull” and not “exciting”.

The chart below shows how markets move.

We have heard the argument that investors can predicate where the next big returns will come from:

2016, 2018, 2019 and 2021 were all about the US. Is this changing?

These are the expected returns over the next 10 – 15 years:

Whether we opt for a fund manager to select the investments, or a passive strategy that simply follows an index, the key is that if want “exciting” then we must take risk. We must also accept that we won’t always get it right.

Building wealth should be a slow process. Evaluating success is important but we don’t have to be top all the time. If we are near the top, then that is okay.

The chart below shows how diversification and holding investments over the long term can deliver strong returns without having to guess what the next big winner is:

In summary, the last ten years have been interesting and certainly technology has been a winner. New technologies have benefited from cheap finance but we are now moving to a more normalised environment. If we think we can predict the future, then “exciting” is fine if we understand the risks. But if we are happy to sit back and watch our wealth grow slowly, it might be dull, but all evidence shows that we will get there in the end.

In terms of what we might look for going forward, that is likely to be quality.

Quality are those companies with low levels of debt, are profitable and likely to have a market advantage. These are likely to be the winners going forward.

Ultimately, success is what we view it as. If our success is being in the top-flight then we are likely to be happy, if our success is based on always being top then we are likely to be disappointed.

Going back to football, Everton have been in the Premiership since it started and yet are not in the top-6 clubs. Aston Villa have been in the Premiership for 25 years. Again, success is therefore what we view it as.

Tracking the market

Bitcoin has dropped back a little bit but remains up +62.00% this year. Crude Oil is down -15.42%. The Hang Seng has moved back into negative territory, however the Nikkei 225 is up +19.10% this year.

 1 January 20131 January 20181 January 20221 January 202331 May 2023Increase (2023)Increase since 2013Increase since 2018
Bitcoin USDN/A14,360.2047,686.8116,625.5126,931.67+62.00%N/A+87.54%
Crude Oil97.4953.7976.0880.5768.15-15.42%-30.10%+26.70%
S&P 5001,498.112,823.814,796.563,853.294,195.19+8.87%+180.03%+48.56%
Stoxx Index287.22395.46489.99430.01451.34+4.96%+57.14%+14.13%
FTSE 1006,276.906,968.907,505.207,451.707,433.82-0.24%+18.43%+6.67%
Hang Seng23,729.5332,887.2723,374.7519,570.4318,121.91-7.40%-23.63%-44.90%
Nikkei 22511,138.6620,773.4929,301.7925,834.9330,768.80+19.10%+176.23%+48.12%

Sources of data: CNBC, Yahoo Finance & Reuters

What is in and what is out?

There continues to be a shift in the top-10 strategies with no clear winners. The top-3 are iShares MSCI Turkey UCITS ETF +49.9%, HSBC MSCI Turkey +49.3% and GS Japan Equity Partners (Hedged) +26.2%.

At the bottom there is a mix of strategies. The bottom three are JPM Emerging Europe Equity -98.60%, LF Equity Income -55.70% and Aviva Inv European Property I -49.9%.

The data from the Investment Association in April continues to show steady inflows.

We were talking to a UK fund manager recently and they were saying how many asset allocators have capitulated when it comes to the UK market, with outflows continuing. The latest Investment Association fund flow figures showed -£1,113 million coming out of the UK All Companies Sector. Putting this into perspective, the next highest outflows were from Strategic Bonds at -£291 million.

The main beneficiaries of new money are Global +£340 million, Specialist Bond +£226 million, and UK Gilt +£259 million. Interestingly +£770 million was moved to Short Term Money Market, again reflecting that sense of uncertainty.

We thought it might be worth sharing the Fear and Greed Index once again. This is a gauge of what emotions are driving the US market now. The theory is based on the logic that excessive fear tends to drive down share prices, and too much greed tends to have the opposite effect. This is a chart going back to 2022 and based on the S&P 500. This has now moved to extreme greed.

What this chart is showing is that investors have moved from greed territory to extreme greed, and it is worth reflecting we were in extreme fear in March 2023.

Another way to look at this, is that when the S&P 500 is above its moving or rolling average of the prior 125 trading days, that’s a sign of positive momentum. We can see how this dropped below the line in March but has since risen.

Although there is a feeling that the US may avoid a recession, it does appear from data the US is close to one.

For the UK this uncertainty may be reflective in the holding of short-term money market instruments.

Although it feels a difficult time the chart below provides some comfort based on past data:

What it shows is that on average, following a significant drawdown, the following year tends to see a strong recovery. We haven’t seen that yet.

We will end with the chart below which shows the impact of missing the best days. Investors who missed the 10 best days would have seen 69% lower returns over the course of that decade on average. 28% of the best days took place in the first two months of a bull market.

Sources of data: TrustNet, Investment Association, Templeton

Talking shop with fund managers

We continue to meet with managers and add the updates on the website.

Below are a couple of updates we have had recently:

Home REIT – this is an investment we hold within the positive impact portfolios and the shares were recently suspended. We have been in regular contact with the management. Although the journey towards recovery may take time, there are positive signs, with a new investment manager being appointed and a turn around specialist taken on board.

This strategy was interesting as it focuses on a particular part of the market where there is a specific need. We do expect the shares to be re-listed and although it may take time, we believe there to be value within the shares, and even if the share price doesn’t rise it is likely that the company would attract a take-over bid which could push those shares higher. As an example Civitas was trading around 55p and has received an offer of 80p per share, an uplift of 45%.

Downing European Unconstrained Income Fund – this was our first introduction to the team who set up the fund in November 2020. The strategy has very little crossover in holdings to other European strategies. It focuses on two sources of returns “off the radar” and “contrarian”.

The fund mainly focusses on “off the radar” stocks and this includes companies such as Talga, who produce low carbon graphite to power the electric vehicle transition. “Contrarian” stocks tend to be those where the market has reacted negatively to something, for example Sanofi, where the market ignored its pipeline of drugs.

It holds 30 to 40 stocks where quality and valuation go hand in hand. It also delivers a growing yield of 3.7% p.a.

Below is performance since launch vs some of its peers.

General disclaimer: The data has been sourced from external sources and although we have looked to ensure this is as accurate as possible, we are not responsible for data they supply. The introduction piece is written in a personal capacity and reflects the view of the author, it does not necessarily reflect the views of LWM Consultants. Equally the views under talking shop are those of individual fund managers. Individuals wishing to buy any product or service because 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 because 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.