July Performance Update

Patience has certainly been required so far this year. It is a pre-requisite of investing for the longer term but is also very easy to forget in times of stress. The theory is simple, though we all know that life isn’t a one way ticket, and sometimes putting theory into practice is easier said than done.

We wrote a blog a couple of years ago titled “you make most of your money in a bear market, you just don’t know it at the time”. The key point is that your return is dictated by what you pay for something, and what you sell it for. When things go down, such as in bear markets, you have the chance to pay less for them, meaning your future return potential increases. Again, it sounds simple when you think in those terms, though in practice the emotional journey often overrides investment principles.

Thankfully we have a philosophy and process that is purposefully designed to help us take advantage of opportunities when they come our way. Whilst our job continues to be about positioning the portfolios for a variety of scenarios, we always feel it’s important to be looking to add risk (in the right areas) when we feel too much bad news is priced in.

Despite the tough market conditions endured this year, in the last few weeks, we have started to see things shift back in our favour. We have been expecting economic data to worsen, as the impact of the inflation trends and interest rate increases feed in, and that is clear now in the data. The early signs of better inflation trends are also there for us all to see, such as petrol prices which are finally falling, and home and mortgage markets which are starting to cool. That doesn’t mean we have solved our electricity and gas price problem, but it is becoming more about just that problem, and less about everything else going up with it.

Policymakers have started to react – not to a huge degree, but the tone has shifted from “all we care about is breaking inflation” to “early signs look good, so we will now watch the data, and act accordingly”. Investment markets have welcomed that shift, with both equities and bonds posting good returns for the month of July.

As avid readers of these blogs will know, we have been adding progressively to our best ideas in both our equity and bond buckets, especially across the last 6-8 weeks. The main aim of this is to build longer term value, though it is also good to see an immediate benefit with a strong month of returns in July, of between 2.15% (Very Low Risk) and 5.91% (High Risk). In addition, we outperformed each portfolios respective risk benchmark significantly.

The question from here then is, have things changed? In some ways yes, in others no. Policymakers have concluded their initial reaction to the inflation trends and are now in wait and see mode. In addition, company earnings have been robust, allaying investor fears for an “earnings recession” as well as an economic one. That combination is certainly better than where we were two months ago.

However, the key variable, inflation, is still to show clear signs of slowing. It is the missing piece of the puzzle that will transform ongoing uncertainty into an upwards trend. Although we have seen some early signs of improvement, it remains unpredictable and we are expecting further volatility ahead.

Overall, July gave us an improving picture and the portfolios a glimpse of the opportunity that is to come. For now though, patience is still required until we see the inflation trends shift, and to that end it is vital we remain focused on the managing and taking advantage of the volatility.