The winter months proved to be an uncomfortable ride for investors as stock markets turned volatile and many experienced fairly significant falls. For UK equities the tumultuous period was laid firmly at the door of ‘Brexit’ uncertainty, whilst concerns around global growth and interest rates weighed on global stock markets.
Whilst no investor likes to see volatility, it is important to remember that there will always be periods of loss. Risk and return unfortunately go hand in hand.
With this in mind this piece looks at how DHM Wynchwood’s investment committee has positioned the model portfolios in recent times, and how we view the state of global markets.
The vote to leave the European Union in 2016 posed a challenge for investors as the end result for the economy could be anything from substantial change to relatively minor change. At the same time, weaker economic ties with the EU could be very damaging for some companies, but a minor inconvenience for others.
In the face of this uncertainty some asset allocators simply decided to sell all of their UK exposure. We take a different view – for two broad reasons.
The first is that what ultimately determines share prices is not the state of the wider economy, nor the prevailing political climate, but the quality of the business itself. Many UK companies will continue to be good investments regardless of how the UK eventually leaves the EU.
The second is that following the referendum result many UK equities, particularly those which are more domestically-focused, have seen their share prices de-rate to such an extent that, by some measures, they have rarely been cheaper outside of recessions or financial crises.
So what are the implications for the portfolios? We have ensured that our UK equity exposure falls into two broad camps; high quality companies, able to grow earnings in a tough economic climate, and companies whose valuation looks extremely low.
Stock Market Corrections
After stock markets climbed serenely higher during 2017, the last 6 months or so have been a reminder of why stock market investing is risky. Shares can, and do, fall in value.
However, we view trying to ‘call’ the top and bottom of the market to be a mistake. Not only is it extremely difficult (many would say impossible) to predict the market’s next move, but if you get it wrong it can be very costly.
For an example of the cost of getting it wrong, consider this fact:
Imagine you could invest directly into the FTSE All Share Index. Over the last 20 years, if you had missed just the 10 highest returning days for the index (out of the thousands of days during that time), your return would be less than half that of someone who had simply invested and left it there.1
“The stock market is designed to transfer money from the active to the patient.”Warren Buffett
Whilst we do not believe in timing the market, we do make gradual movements to the portfolios based on which asset classes look expensive, and which look better value.
At the beginning of last summer we believed many stock markets had got ahead of themselves. In response, we added some investments which tend to do better when stock markets are weak, such as absolute return funds.
Looking ahead, though we cannot predict what will happen next week or next month, we believe that maintaining portfolios which are diverse across regions and asset classes will pay dividends for those who are patient.
Disclaimer: The content of this article should not be taken as financial advice
1 Source – JP Morgan