5th May, 2022
April Performance Update
One of the biggest challenges when investing is trying to retain a long-term perspective. The speed and frequency of news flow, which is mostly designed to shock us into reading and watching, can change our bias to worry about the next day, week, and month. It leaves us so aware of what’s happening today, and often shifts focus from what is important and what is relevant over the longer term.
As we discussed in our last blog, the market has had to absorb some new challenges in recent months, not least the implication of higher inflation and interest rates, in addition to the Russian war and Chinese lockdowns. These factors were very much centre stage across April, and whilst investors may continue to focus on short-term trends into early summer, we view the most important implication of the last four months as a re-price of assets, many of which we feel will do really well over the years ahead. Paradoxically, the world as we know is moving towards cleaner energy and lower carbon emissions, yet in the first part of this year, stocks that operate in the opposite context have been rewarded heavily, at the expense of those assets designed with providing a sustainable future. This is a short-term supply derived problem that will resolve itself over the coming 12 months, and represents a good example of current market short-termism.
Nonetheless, many of what we would call ‘sustainable’ and ‘quality-based businesses’ are much cheaper now than they were 6 months ago. Whilst this has been disappointing for our portfolios right now, we feel it will lead to higher future returns. At the same time, although we added to energy and the oil heavy FTSE 100 earlier in the year, this was more as a hedge against a protracted war and continued supply chain issues. We must be careful not to get caught up in short-term thinking. Oil prices are unlikely to repeat their last 12 months increases in the next 12 months, and we see risks in buying things that have already gone up in value, with the expectation that it will continue into the future.
To that end a long standing investment principle is that the best time to invest is when prices have fallen. The more bad news that is baked into the price of something, the greater the chance of a positive surprise. This is particularly important when we are talking about the valuations of sustainable, profitable, quality businesses, which have fallen in value despite their long term drivers remaining fully intact.
To further illustrate the repricing we have seen, bonds have moved from offering income returns of 1-2% at the start of the year to 3-4% at the time of writing. Although it naturally doesn’t feel great that our bond bucket is down 5% over the course of this year so far, our forward 10 year return expectations have increased from where they were in January by between 10% and 20%. To an even greater extent this is also the case in equities, with some segments of the market down 50% since the start of the year just on sentiment alone. Even if equity markets fall another 5-10% from here, the opportunities that have been created on a 3-5 year view are excellent.
So whilst a significant portion of our job is based on trying to predict the forward economic environment, we know we can’t control it. It is therefore crucial to not get overly influenced by the noise, and stick to sensible investment principles. Staying focused on the long term, and increasing risk when assets become cheaper are two of the most important, and to that end we continue to focus on repositioning for when things improve.
In the meantime, it’s worth noting that although the recent months have been difficult, the long term returns delivered by all portfolios remain very much on track. This year’s correction places us in a better, not worse, position to deliver that once again over the next 10 years, which is really a more appropriate time horizon for us all to focus on.