One of our favourite investors Bruce Berkowitz comments that it is perhaps arbitrary to judge an investment portfolios success or failure by one revolution of the earth around the sun but it is the convention.

The portfolios ALL beat their benchmarks in 2012 and achieved double digit return. This is a more than satisfactory performance but especially when compared to the yield on cash of around 1%.

Historically the yield above cash on bonds and circa 3-4% and equities 5-6% so the portfolio returns of 9-11% above cash have been extremely strong.

The story of 2012 was predominately one of concerns unfounded and fears unrealised.

The Euro was perceived to be in peril until Mario Draghi committed to do “whatever it took” to protect it. The US election and Fiscal Cliff were both resolved successfully and with Chairman Bernanke creating QE3 (or QE infinity as it has no specified end) markets generally ended 2012 in a more positive and progressive mood than at any time since 2008.


The answer to the question, “what does the future hold” is well answered by Mr J.P Morgan, who replied to a similar question about the future movement of the markets by saying,

“I can confidently predict the future will be influenced by mostly things we don’t know about yet.”

The talking heads of T.V. and print who predict the future in details are sometimes proven right but only because if enough people say enough things some of it will be correct simply due to the law of averages.

Those that get it right are then amusingly followed as mystics only to ultimately and sadly be revealed as just the lucky guessers.

That being said there are some fundamental themes that can we think be identified,

  1. Interest rates will likely remain very low for the foreseeable future. This is probable as economies are fragile, employment is fragile, morale is fragile and the raising of interest rates is effectively a tax increase which neither individuals nor business can bear.
  2. Growth will be far stronger in the East than the West.
  3. There will continue to be strong demand for assets which produce a yield above cash.

This is an area that concerns us, there is undoubtedly a distortion in the value of Sovereign debt, bonds and commercial real estate due to low central bank interest rates. The stock market volatility of the last 5 years has resulted in enormous flows of funds being diverted into these markets and the valuations are now excessive. This phenomena will inevitably unwind, it may be gradual or it may be violent but it will reverse, the unknown of course is when?

The portfolios have been rebalanced away from Western and into emerging market debt (which we have written about previously), just because a market is currently expensive does not mean it can’t get more expensive still, but we know that when the herd decides the party is over the resultant stampede for the exit is financially destructive.

Equity markets have, in certain areas, experienced a similar distortion in valuation. The Multinational high dividend paying, strong balance sheet companies have become expensive as they are the equity equivalent to bonds. The more cyclical shares in sectors such as Industrial, Technology and especially Financial have been downgraded, in some cases savagely, as they were perceived to be high risk.

This will also undoubtedly reverse at some point (again the when is unknown) but there is significant value in these sectors which will be harvested when the herd exits debt investments and returns to the equity markets.

To illustrate this point it is instructive to look back at the history of the last 30 years. In 1982 equities had returned poorly for a decade and bonds were the preferred investment, equities were written off in the media as broken.

Between 1982 and 2000 equities hugely out performed bonds.

From 2000-2012 bonds once again significantly outperformed equities and as in 1982 the obituary of equities as an investment class are again being actively written.


It is interesting to consider whether the world is at times more or less potentially dangerous (World Wars excluded) or whether perception coloured by recent experiences creates either an impression of a probably benign or tempestuous future.

The causes of the Financial meltdown in 2008 will not repeat in the same form anytime soon, that stable door is now firmly closed, new ways will be found to game systems and create imbalances but whilst the collective fear level is so high this is less likely, it will be in the lazy hazy days of perceived equilibrium and equanimity that the seeds for the next fads and bubbles will be sown.


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. This is not a recommendation to buy any product or service including any share or fund mentioned. 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.