Wellian Weekly 15.06.2020

Is the “weight” worth the “wait”?

Investing is not easy. No matter what anybody says. One of the main reasons is there is not one measure of success. The goal posts constantly change.  For instance, if my portfolio has achieved 10% (let’s say the portfolio is constructed of UK large cap stocks) and the benchmark index (a very relevant FTSE 100) has achieved 5% then you could argue that my portfolio has done well. But, if my 10% was achieved with 20% volatility and the index only achieved 10% volatility, have I done as well?  What if my 10% was achieved with 8% capital and 2% income, whereas the benchmark was 1% capital and 4% income and I was an income seeking investor (selling capital gains and using them as income aside).  There are so many “what ifs” when you use more than one measure of success.  Measuring David Beckham for his abilities as a footballing midfielder in reference to pinpoint accuracy on crosses or free kicks, or rallying the team as a captain is one thing. Measuring him for defending, tackling, kicking the ball with his left foot or heading the ball is another. So, overall, is he good or bad?

Bringing this back to investing; having a 0.1% position in a fund that goes up a great deal might not offset a 10% position that goes down a little more than the average. Due diligence on markets, indices, volatility etc is a great risk management tool, but not position sizing correctly in line with the risks objectives of a client is not going to get you any thanks.  We purposefully used the word risks rather than risk in the previous sentence because we try to build portfolios that look through a lot of risks. Diversification, market capitalisation, yield, correlation, manager style, investment philosophy, asset class and many other considerations are needed to be taken into account when constructing a portfolio. Building a portfolio for the short, medium and longer-term also needs different skill sets, different tolerances to risk, different understandings and different decisions at different stages of the economic cycle or market activity. When you are building a portfolio you need to balance all of these factors. Take for instance BH Global – a hedge fund wrapped up as an investment company. The chart below shows the performance of the fund year to date (27 May) with a mightily impressive positive 23.89% return.

Year to Date Chart

Year to Date ChartShowing the 5-year return number and the fund has registered a positive 42.97%, which roughly works out at 8% per annum and very acceptable considering in the last five years we have seen the coronavirus impact, a couple of British elections, a change of US leader, a referendum relating to Brexit (remember that?) huge oil price volatility and (for UK investors) a currency that has lost about 1/3 to its international brethren. In the same time we have seen lots of other global factors such as the US/China trade wars, Italian budget issues, changes of leadership at the IMF, the ECB, the BoE, the Federal Reserve. We’ve seen political shenanigans in Brazil, Russia (including annexing of Crimea and troubles with Ukraine). Basically, what I’m saying is there has been a lot of change which can (and does) make markets volatile.

5-Year Chart

5-Year ChartThe 5-year number to one year ago was 21.02%, taking that rough annual number down by half to an average of about 4% - not so impressive you might argue. But, at least it’s positive.

I realise this is a hedge fund and not truly comparable to the MSCI World Index, but, once again, investing is not easy. Our performance numbers are regularly compared against equity indices, even if we only have a limited exposure to equities when markets are going up. We are also questioned as to why we didn’t “go to cash” for instance when markets fall, even if the client has explicitly told us to have a range of “between x and y” across different asset classes. It can be a thankless task at times.

So, taking the performance numbers and time frames from above and then adding the MSCI World Index to the chart and all of a sudden the numbers are different (even though they are actually the same) as there is now something to compare.. (regardless of whether that comparison is actually comparable!) In looking at these three charts, I would imagine three different emotions are triggered and once again, that’s why investing is difficult.

We are long-term investors. It takes time to build a long-term portfolio and for the characteristics of a portfolio to bed down and do what you would expect of it in different market conditions.

I have said many times before that if Index A and Index B have zero correlation to each other over 10 years, the only way to achieve this number is to own both indices for the whole decade and try to ignore / forget the short-term correlations as they could well be perfectly correlated.

Year to date Chart

Year to Date Chart5-Year Chart

5-Year Chart

5-Year to 1 Year ago Chart

5-Year to 1 Year ago Chart

Sometimes a fund sits in the portfolio seemingly doing nothing until it is needed. In the meantime, it is silently adding diversification, changing the correlation of the assets and the volatility of the portfolio. But, because there are times when it can sit there doing nothing, seemingly underperforming the position weight needs to be taken into consideration. Some funds in a portfolio are considered insurance policies, but just like home insurance, the amount you pay needs to be weighed up.  I read not too long ago about Wimbledon having taken out a pandemic type insurance for over 20 years, and in the process spent tens of millions of pounds with no return.  This year the policy paid out and the Tennis championship will continue in future years. I wonder how many times in board meetings over the years the committee got together and questioned whether it was a good decision or not.

I’ve written before about “time in the market versus timing the market”, but increasingly I’m becoming very aware of the need to balance and blend risk in the portfolio is “wait in the market as well as weight in the market.”

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