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In “Howay the Ladds” this month we are looking at the basic need of certainty.

“We want to avoid pain and we want assurances that our basic needs are being met.” – Susanne Madsen, “The Power of Project Leadership”.

May Spotlight

A basic desire for all of us is that of certainty. Certainty, in theory, helps us avoid pain and ideally find some comfort.

If we can control elements of our lives then it follows we will be happier, and therefore we create routines because they follow a pattern and provide that degree of certainty we long for.

If anything disrupts that pattern then it is very hard to think clearly. The last three years have disrupted the financial pattern and have been a rollercoaster ride for investing.

The first quarter of 2020 saw markets tumble.

From the second quarter of 2020 up to the end of 2021 we saw a recovery in markets.

In the first quarter of 2022 markets tumbled again.

Since the second quarter of 2022 markets have effectively remained flat.

Investing is a journey from A to B. If we invested £10,000 today and came back in 10 years time and found it was worth £50,000, would we be happy?

The answer is likely to be yes. However, if at some point the value was £65,000, how would that make us feel? Or equally if the value was £5,000?

The point being that to deliver a return on investments will require a degree of “risk”. That means that investments will go up and down.

This chart from ruleoneinvesting.com is a great illustration of how investors feel.

Ultimately, investing is all about our own financial plans. Nothing else matters.

This illustration from Behavior Gap sums this up well.

It is frightening how much data is generated daily. Some stats from visual capitalist:

  • 500 million tweets are sent.
  • 294 billion emails are sent.
  • 65 billion messages are sent on WhatsApp.
  • 5 billion searches are made.

By 2025, it is estimated that 463 exabytes of data will be created each day globally – that’s the equivalent of 212,765,957 DVDs per day!

So, coming back to 2022 and 2023. What do we know? A good starting point is the chart below:

There will always be stock market crashes and these periods are hard for investors. Sometimes the recovery in markets is not immediate, but volatility does not equal a financial loss unless we choose to sell at that point.

This chart further illustrates how the returns can vary over different periods.

So, how do we create certainty in an uncertain environment where there is so much data available? Many have not witnessed what we are seeing today because since 2008 investments have done well and interest rates and inflation have been relatively low. If interest rates end up around 3% and inflation around the same, these will still be low in comparison to history. But all of this is speculation as we do not have a crystal ball to foresee the future.

In these times the most important thing is our financial goals. What do we want, when do we want it and how do we plan to reach those goals? Everything evolves around that. It is basically “eat, sleep, repeat”.  (Or for those who like Fatboy Slim “eat, sleep, rave, repeat”!!)

Yes, we may have to tweak the investments to reflect a more normalised environment but fundamentally everything starts with the goals, and then the plan. Everything after is about ensuring that this is reviewed, if necessary amended, and that process repeats….” eat, sleep repeat”.

In summary, it may seem that what is happening in markets feels like that sense of certainty has been taken away. In reality, if we focus on what we know, which starts with our financial goals, then that is what we anchor our certainty on. The journey from A to B will not be smooth but as long as we remember “eat, sleep, repeat”, that should give us comfort in even the most challenging of times.

Tracking the market

There is no doubt that the rise of Bitcoin will make headlines. This is up 76.04% this year, but the price is below the 47,686.81 as of 1 January 2022. Gold has moved into positive territory and is up +8.38% this year. The best of the indices we follow is Japan up +11.70% and Europe up +8.51%. The markets are more volatile this year and therefore the indices do move a lot.

 1 January 20221 January 202330 April 2023Increase
Bitcoin USD47,686.8116,625.5129,268.81+76.04%
Crude Oil76.0880.5776.78-4.70%
S&P 5004,796.563,853.294,169.40+8.20%
Stoxx Index489.99430.01466.64+8.51%
FTSE 1007,505.207,451.707,870.60+5.60%
Hang Seng23,374.7519,570.4319,894.57+1.65%
Nikkei 22529,301.7925,834.9328,856.44+11.70%

Sources of data: CNBC, Yahoo Finance & Reuters

What is in and what is out?

There is a great shift in the top-10 over the last 12-months. Except for one fund all the strategies are European. The top-3 are SDPR MSCI Europe Consumer Discretionary UCITS ETF +42.00%, Lyxor EURO STOXX Banks (DR) UCITS ETF +37.10% and Polar Capital Biotechnology +32.00%.

At the bottom there is a mix of strategies. The bottom three are JPM Emerging Europe Equity -98.50%, LF Equity Income -58.50% and Schroder ISF Emerging Europe -41.30%.

The data from the Investment Association data shows inflows during January through to March, although these remain subdued.

The flows of money include Global +£365 million, Emerging Markets +£263 million, £ Corporate Bond +£529 million, Short Term Money +£667 million. It is interesting to see investors moving to Short Term Money, which might be a tactical move to drip feed money into the market.

In terms of money coming out, UK All Companies was down -£735 million, Specialist Bond -£381 million and UK Gilts -£184 million. We are not surprised about the UK, which remains unloved. Interestingly both Japan and Europe have performed better than the US but have seen money coming out. Japan is down -£151 million and Europe -£179 million. The US is flat.

We thought it might be worth sharing the Fear and Greed Index. This is a gauge of what emotions are driving the 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.

What this chart is showing is that investors have moved into greed territory from 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.

This may reflect that investors feel it will be a shallow recession, or perhaps it will be avoided. We continue to be on the cautious side in the short term but longer term, as the chart below shows, there is plenty of room for returns over the next 10-15 years.

When we consider the inflows of money and the amount in Short Term Money, this perhaps reflects a slightly more cautious investor who is looking to invest over time.

It might be worth ending with this chart which shows the volatility. This really shows how much this moves. When markets go up then the volatility measure goes down, and vice versa. If the VIX spikes, then the Greed Index will move towards Fear.

Sources of data: TrustNet, Investment Association

Talking shop with fund managers

We have completed 31 fund manager reviews so far this year. Some of them are on the website and the others will be added shortly. https://lwmconsultants.com/portfolio/fund-manager-meetings/

We have picked some examples of strategies which are interesting. We would stress these are not a recommendation to invest, and we would need to do further work if we were to add these strategies in the future. Past performance mentioned is no guide to the future and investments can fall as well as rise.

Aikya Global Emerging Markets Fund – this was established in 2020 and most of the team come from Stewart Investors. Aikya plan to only run this strategy so this is their sole focus. It has delivered strong performance since launch at relatively low levels of volatility.

One of the things that is different to this strategy is the focus on companies that have no government connection. This means in China there are only around 20 companies they can invest in. It is unlikely they would hold Samsung for governance reasons and Alibaba for the complex capital structure. It is a highly concentrated portfolio of around 35 names. Their quality screens have identified 111 companies they can select from. So the holdings would likely be different to others.

In 2022 it was up slightly and the index was down -12.21%. Since launch in 2020 it has returned 17.69% vs the index which has returned -0.71%.

SKAGEN Focus Fund – this is a Norwegian Fund Manager. The fund was established in 2015. This is focused on misunderstood companies with strong balance sheets, and where change can drive future value. This has an exclusionary policy so does not hold fossil fuels, and unusually with these types of strategies it has very little exposure to banks.

It has exposure to the green transaction with companies such as Befesa, Ivanhoe Mines and Cementir Holding. It currently has a low exposure to the US as this market is expensive.

So, effectively this is focused on high quality companies that are going through change and are offering a discounted share price.

In a more normalised environment, where quality and change are likely to come to the forefront, this is an interesting strategy. The return over three years was 88.81% vs the index at 47.20%.

Alquity Indian Subcontinent Fund – this is a specialist emerging market and Asia fund manager. This strategy has been running since 2014. India is a complicated region for investors. Demographics and change could make this a fascinating long term investment opportunity. However, it is also likely to be volatile.

This strategy is different to others as it is more domestically focused (31 of the 34 names). There is also a focus on quality and therefore this is unlikely to have the usual names such as Reliance Industries Limited. Over the last couple of years there have been significant changes at Alquity, especially around risk management. This is starting to come through in the numbers over the short term.

Over three years the fund returned 88.84% vs the index at 72.11% and was second in its category.

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.