In this month’s “Howay the Ladds”, we want to share some insights into investing.
November 2023
Sometimes we are asked why we didn’t invest all the portfolios in the S&P 500 or the FTSE 100.
It’s a great question.
Effectively, the real question is why we don’t invest where the returns have come from. The chart below from JP Morgan shows the returns across the world stock markets over the last ten years.
If we had invested purely in the S&P, the return would have been 16% p.a.
The chart below from JP Morgan shows assumptions for future returns:
This leads us to the purpose of this blog. When putting together portfolios, the primary aim is to manage the risk. We call this this diversification. We wanted to share our thoughts on approaching this and why it is necessary.
At a top level, the idea is not to take a “single bet” but to spread the funds across a range of stocks, bonds, and alternative assets, thus avoiding putting “all our eggs in one basket”.
Diversification is not designed to maximise returns. This is because we do not have perfect knowledge of the future. If we did, we could pick one fund or stock and allow that to deliver the returns we needed.
Our role is to grow wealth slowly; this means that investors who concentrate capital on a limited number of investments at any given time may outperform us. We describe this as the tortoise and the hare. Over time, we should outperform without taking the same degree of risk.
The table below from Vanguard shows the returns from UK equities, UK bonds and cash.
Equities, over the long run, have achieved the best return; however, they also carry a higher level of risk (volatility). Volatility is the movement in the value of the holding. Traditionally, when stocks go down, bonds go up, and vice versa. This led to an investment model called 60/40. Effectively, 60% was invested in stocks and 40% in bonds. The chart from Vanguard shows the average annual return.
Not every investor is the same, so some models have a higher weighting to bonds and some a lower weighting. The chart below shows 100% invested in stocks.
In our view, alternatives are not just about bonds (debt) but can include other assets, including infrastructure and property. This is simply because it enables us to have different levers generating returns.
One other piece to add to the pot is currency fluctuations. Diversification can negate currency fluctuations.
In terms of how we approach this, below is the split of the principal portfolios:
| Cautious | Balanced | Moderately Adventurous | Adventurous | |
| Fixed Income (debt) | 27.00% | 19.50% | 8.00% | 4.00% |
| Alternatives | 27.00% | 20.50% | 16.00% | 13.00% |
| Traditional developed market equities (UK, US, and Europe) | 22.00% | 29.00% | 29.00% | 29.00% |
| Emerging Markets, Asia including Japan | 11.00% | 16.00% | 22.00% | 27.00% |
| Specialist Global | 13.00% | 15.00% | 25.00% | 27.00% |
Using BlackRock, if we consider the standalone risks of each of the holdings, we can see the sensitivity towards interest rates and currencies.
However, the risk changes by blending the different strategies (diversification). Currency risk is negative. Effectively, diversification has removed the currency risk.
In terms of what to expect, the table below from BlackRock is a calculation of future risk. So, say the average return of the balanced portfolio was 6.06% over five years. This states the volatility could be plus or minus 10.81%, between -4.75% and +16.87% at any given point. The beta indicates that the portfolios are less volatile than the MSCI All-Country World Index.
All of this is theoretical, based on past data; however, it provides us with an idea of whether the portfolios we are creating will deliver the returns we are looking forward to in the future.
In summary, building the portfolios is a mix of different elements. Much work is done around the investments, meeting fund managers and analysis. But this is only one element of the process. How the assets blend is essential, so seeing how diversification reduces some of the risk is just as important. There is no point in having great funds and finding that the risk/volatility is sky-high.
Over the last four years, we have invested much time into new systems to ensure that we get that understanding. We know the last couple of years have been tough. However, the changes in July should benefit the portfolios when the markets turn.
Tracking the market
October was perhaps a month we would wish to forget. However, it does feel we are near the bottom of the market. It is also interesting to see a sudden recovery in Bitcoin and that Japan has performed as well as the US since 2013.
| 1 January 2013 | 1 January 2018 | 1 January 2022 | 1 January 2023 | 31 October 2023 | Increase (2023) | Increase since 2013 | Increase since 2018 | |
| Bitcoin USD | N/A | 14,360.20 | 47,686.81 | 16,625.51 | 34,667.78 | +108.52% | N/A | +141.42% |
| Crude Oil | 97.49 | 53.79 | 76.08 | 80.57 | 81.02 | +0.55% | -16.89% | +50.62% |
| S&P 500 | 1,498.11 | 2,823.81 | 4,796.56 | 3,853.29 | 4,193.80 | +8.83% | +179.94% | +48.52% |
| Stoxx Index | 287.22 | 395.46 | 489.99 | 430.01 | 433.60 | +0.83% | +50.96% | +9.64% |
| FTSE 100 | 6,276.90 | 6,968.90 | 7,505.20 | 7,451.70 | 7,231.70 | -2.95% | +15.21% | +3.77% |
| Gold | 1,660.60 | 1,339.00 | 1,799.40 | 1,836.20 | 1,985.20 | +8.11% | +19.55% | +48.26% |
| Hang Seng | 23,729.53 | 32,887.27 | 23,374.75 | 19,570.43 | 17,112.48 | -12.56% | -27.89% | -47.97% |
| Nikkei 225 | 11,138.66 | 20,773.49 | 29,301.79 | 25,834.93 | 30,858.85 | +19.45% | +177.04% | +48.55% |
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 Eastern Europe and Japan featuring the most. The top 3 are iShares Poland UCITS ETF +50.80%, Schroder ISF Emerging Europe +40.80% and Magna Eastern European +38.20%
At the bottom, there is a mix of strategies, but clean energy seems to feature the most. The bottom three are BlackRock LifePath 2025-2027 -98.90%, HANetf Electric Vehicle Charging Infrastructure -70.30% and Invesco Solar Energy -44.90%.
The Investment Association shows there were slight inflows in August.
Interestingly, in July and August, there were positive inflows into equities. The primary recipients appear to be Asian and Global strategies.
We used this chart recently in the quarterly updates and it feels like we are close to the bottom of the market.
The Fear and Greed index is a good sign of sentiment in the US, and this has collapsed. In June 2023, it reached 84, pointing to extreme greed; at one point, this tumbled to 20, indicating extreme fear.
The VIX index is an excellent guide to sentiment, which remains relatively low, although spikes reflect a fall in markets.
The chart below is from Bloomberg; the article from Bloomberg indicated that since 2011, when cash levels rose, it implies a pessimistic view of stocks and tends to signal a recovery.
The indications are that we are close to the bottom of the market. Considering the long-term outlook, the two charts below from JPMorgan indicate that valuations are cheap compared to their average and that the potential returns remain positive. We can’t say when this happens, but we take all of this as positive signs.
Sources of data: TrustNet, Investment Association, Bloomberg, CNN, JP Morgan
Talking shop with fund managers
We continue to meet with managers and add updates to the website. https://lwmconsultants.com/portfolio/fund-manager-meetings/
FP Carmignac Emerging Markets Fund
We recently met with the manager to review this strategy. We like this strategy for several reasons, but the main ones are the focus on quality, consistency in performance and a stable investment team.
This is perhaps different from other strategies in that it has delivered a positive outcome for investors without sacrificing returns.
It has specific exclusions, so the mainstream portfolios blend it with Redwheel.
Xavier has a contrarian view of China and has a higher weighting to this region, where he sees significant opportunities. He also has exposure to countries such as Mexico, which benefit from de-risking from China. Vesta is one holding that is a real estate company.
Since its launch, it has outperformed the index. It is important to stress that past performance is no guarantee of future performance.
Tellworth UK Select Fund
This is a strategy we are researching. It holds circa 40 longs and 40 shorts. The table below outlines, in theory, what this means.
What interests us is the consistency of performance.
| 2020 | 2021 | 2022 | 2023 |
| 12.66% | 12.14% | 7.08% | 5.22% |
The return since launch has been 9.69% p.a. with a volatility of 2.97%. Further work is needed to understand the risks.
General disclaimer: The data has been sourced from external sources. Although we have looked to ensure this is as accurate as possible, we are not responsible for the data they supply. The introduction piece is written personally and reflects the author’s view; it does not necessarily reflect the opinions of LWM Consultants. Equally, the statements under the talking shop are those of individual fund managers. Individuals wishing to buy any product or service because of this blog must seek advice or conduct their research before making any decision. The author will not be liable for decisions made because of this blog (particularly where no advice has been sought). Investors should note that past performance does not guide future performance, and investments can fall and rise.