As we come into Autumn, I wanted to do something a little different for my blog.

PDF Version

September 2023

We’ve spent a lot of time talking about history and the theory of returns. This time I thought I would write something a bit different. Inspired by something I recently read, “you are – what you think about (recession, economy, stock market)”.

I always caveat what I write because the reality is that I can only look to history, theory, and logic. The article I read explains that economies have many moving parts and points out how complicated it is to forecast. Apparently, the federal reserve employs a few hundred PHDs who stare at economic data 24/7, and they have yet to get it right!

The article goes on to say that time is the currency of life, and the attention should be on how we choose to allocate this currency. My role naturally leads me to spending most of my days thinking about markets and what this may mean for the money we manage. I care very much about this and so my time is spent trying to understand what is happening.

We talk a lot about being long term investors and yet it is easy to get wrapped up in the here and now. It made me think about a hobby I have recently taken up.

Over the Summer I spent time building a Lego Land Rover Defender. I paid £100 for it. The set was released in 2019 and retired in December 2022. The table below shows the current range of values for a used set. In just a few months the set has returned between 15% and 48%.

When you investigate Lego you can see that as products retire, so the value potentially goes up.

The chart below shows the growth in Lego between 1987 and 2015.

This is a healthy return of around 11% p.a. Even looking at recent returns, it remains an attractive asset class.

The chart below shows the value of a new / sealed Lego Land Rover Defender since its retirment.

The point of all of this is perhaps to demonstrate that, whatever we invest in, it takes time to see that return come through. I use Lego as an example because the scatter chart shows that as sets are retired there is a rush to invest. Often people overpay in the short term in the hope that long term the investment will pay off.

Lego is a great example of how to invest (assuming you don’t want to play with it!) It is about the research, what is likely to go up in value, the price that you pay for that and then it is the long game. After that, it is about sitting back and allowing that value to grow. Of course you can speculate but as the chart shows you can easily overpay.

In summary, the article I read and mention at the start talks about the currency of life. As I have said, my job naturally means that I spend a lot of time looking at the markets and analysing our investments. I can’t predict what the future holds. Although in the short term everything appears uncertain, however hard it is we must focus on the long-term. It is fascinating to consider that Lego can be a great example of playing the long game.

Tracking the market

August seemed to reverse much of the gains in July, with only Crude Oil showing positive returns from the table below. Over the longer term the indices have performed strongly except for the Hang Seng index.

1 January 20131 January 20181 January 20221 January 202331 August 2023Increase (2023)Increase since 2013Increase since 2018
Bitcoin USDN/A14,360.2047,686.8116,625.5125,931.47+55.97%N/A+80.58%
Crude Oil97.4953.7976.0880.5783.63+3.80%-14.22%+55.47%
S&P 5001,498.112,823.814,796.563,853.294,507.66+16.98%+200.89%+59.63%
Stoxx Index287.22395.46489.99430.01458.19+6.55%+59.53%+15.86%
FTSE 1006,276.906,968.907,505.207,451.707,439.10-0.17%+18.52%+6.75%
Hang Seng23,729.5332,887.2723,374.7519,570.4318,382.06-6.07%-22.54%-44.11%
Nikkei 22511,138.6620,773.4929,301.7925,834.9332,619.34+26.26%+192.85%+57.02%

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 Schroder ISF Emerging Europe +49.50%, iShares MSCI Turkey UCITS +49.40%, and HSBC MSCI Turkey +48.90%.

At the bottom there is a mix of strategies. The bottom three are BlackRock LifePath 2025-2027 -99.00%, LF Equity Income -56.80%, and HAN Medical Cannabis and Wellness UCITS ETF -46.50%.

The most recent fund data is the end of June. We have not included this as it is the same as last month.

The Fear and Greed Index has bounced a lot during August and has moved back into “greed”.

The VIX index is a good guide to sentiment and this remains relatively low, although there are spikes which reflects a fall in markets.

We have talked a great deal about whether a recession is coming and how this could be catalyst for a turnaround in performance. Below are some recent headlines.

The general feeling seems to be moving towards a recession. The chart below is the Global Manufacturing Purchasing Manager Index. The data is a good indicator of the health of an economy. Below 50 and this is a flag. Eurozone is at 43.5, US 47.9 and UK 43.0.

Below is the US Economic Monitor which is showing a greater move towards recession risk.

Below shows the same for Europe:

The chart below shows price to earnings rations and these still seem elevated.

When we look at the data you can see much of this is driven by the US.

When the markets turn it is likely those regions that are undervalued will do better over the long term.

In summary, what we are seeing is greater noise pointing to weaker economic data. Not all parts of the market are overpriced and once we reach the bottom of this cycle the recovery may come quickly. We don’t know when that will be but we feel we are edging closer to that point.

Sources of data: TrustNet, Investment Association, Templeton

Talking shop with fund managers

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

We have started to research some of the existing holdings and notes will be added to the website. We thought it might be good to highlight a couple of funds. These are not recommendations and are part of the portfolios following extensive research. Past performance detailed below is no guide to future performance and is not guaranteed.

GS Japan Equity Partners Fund

The Nikkei 225 Index has seen a strong recovery after a period of underperformance. It had also become relatively unloved. We like this strategy because we feel it is slightly different to other options available.

Firstly, this looks for strong businesses which are expanding into new businesses or expanding overseas. Effectively they look for the sweet spot between new upcoming businesses and old legacy businesses.

The second area which makes this interesting is the exclusionary policy, which is probably the first time we have seen this with a Japan Fund.

All of this leads to the consistency of performance.

Janus Henderson Diversified Alternatives Fund

This strategy was established for a pension fund. It looks to deliver a return of CPI +3% p.a. Inflation has impacted the performance target.

What we like about this strategy is the underlying assets, where the fund manager looks to invest across alternative assets and strategies. This provides access to asset classes that we probably wouldn’t directly invest in, including private equity, commodities, reinsurance, and hedge funds.   The chart below shows how the team will actively move the assets to where they see the greatest opportunities.

For us, we see this as a good blend within the portfolios, offering something different to other strategies.

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.