I was fascinated when reading a recent research paper, which canvassed 161 pan-European Pension Scheme Managers, with more than 1.71 Trillion under management. The survey was followed up by interviews with thirty senior executives to obtain their detailed insights. Broadly, these “experts” felt that in terms of the investing environment immediately ahead, there was a sunny outlook with cloudy skies, but still some uncertain political risk remained.
There is much talk of interest rates rising and that this will be the start of the cause for collapse in share markets. Interest rates will rise when inflation is evident, but is inflation yet that apparent? Will interest rates move that quickly? A premature or accelerated interest rate hike could just cause a market collapse (woe betide the Central Banker that causes that)! Yet, if we think about it, the global recovery has yet to generate the actual earnings boost that could justify the current valuation in equities. For those who pull the rate hike lever (Central Banks), it’s excess earnings growth, not equity valuations, they’re concerned with.
Overall, most Pension Fund respondents agreed that while the US market looks stretched, Emerging Markets, Japan and Europe are not yet as full. The survey revealed that 95% of respondents are concerned with big market events, but that these “big” events actually only occur 5% of the time.
It’s volatility that most of us fear and that simply reinforces the case to be long term investors, to ride out the volatility. As has been said so often, timing the market is a fool’s errand. Good Asset Managers will rely on ‘diversification’ to spread risk, many will be attracted to absolute return type styles, as well as simply adopting a ‘buy and hold’ approach, for those pillars in a portfolio bought for dividend and long term earnings growth. Opportunistically, they’ll look for ‘mean reversion’ opportunities, when the price is discounted and the stock is on sale. Passive investing should be done cautiously when markets are at all-time highs, as they tend to offer little downside protection.
As an investor, a Pension Scheme has a much longer perspective than most of us and yet, anyone younger than sixty has to be planning thirty years ahead - simply to be certain of their own care (let alone investing wisely for their family who may ultimately be the beneficiary). A Pension Scheme may survive beyond thirty years, but they’re not planning that today. Their strategies will not be so dissimilar to the kind of plans any good Financial Adviser would construct for their investing client.
At a time in humanity’s history when longevity is on the rise, Shares are deemed to provide the upside to tackle the issue of purchasing power parity, but as we have said, Shares can be extremely volatile on occasion. Bonds, Term Deposits and alike, by comparison offer only a coupon and, if inflation is on the rise, it’s very possible that this type of security will not keep pace with the rising cost of living (in the long term). It is only in the short term (up to five years) that we still expect some protection to be afforded by such investing devices. Even then, this relies on selecting securities with strong credit credentials (not all “low risk” investments are safe, as some found from so-called low risk finance / mortgage company securities; while more regulation has helped clean things up, it still remains the responsibility of the Investor / Adviser to know the risks).
Back to our Pension Manager survey for 2018: Bottom line, they all agreed the old rules remain and “time in” the market, will matter more than “timing” the market, the emphasis of any strategy needs still to invest in quality assets. A timely reminder to stick to the basics when making long term investment plans, and to not be impatient or tempted by the latest craze / trend.
To our mind, investing is still a personal strategy. While the ultimate goal of investors will often be the same, the pathway to achieving the goal can vary greatly. Asset management or financial advice will vary. No one needs a one-size-fits-all approach, and much value can be added by putting in the extra yards, to tailor the approach. Long term, we do expect to deliver greater value, but acknowledge in the short term, anything can happen and risk is often as variable as returns.
Tony Munro CFPCM AFA
The views and opinions expressed in this article are intended to be of a general nature and do not constitute personalised advice for an individual client.
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