As I write this (April 6th), I see stock markets well up on the day across the globe and Sterling is down. Both these factors (if they prevail until markets close) will give our porfolios a little Springtime valuation lift. Of course, that is one day’s events and as such pretty useless information for someone pondering the future direction of markets. But maybe short term data is of some use? That is my theme this week.
YTD (year to date)
3 months data (YTD for 2021) is arguably more useful, not in terms of predicting future valuations, but because we know the global macro economic context and we can see how invesors in different places and types of assets have reacted to the sort of changes I highlighted in my Watching Brief last week.
If I had to pick only 3 relevant contextual factors, they would be these:
- economic recovery driven by vaccination programmes (or low Covid 19 incidence as in China),
- US government spending plans and the impact of those on inflation and interest rates,
- finally, those who prefer real profits to speculative momentum gains raising their voices more audibly and maybe being listened to.
Here is some data (year to date, various sources and rounded slightly).
Note that data extracted over a short period is very sensitive to the start and end dates (in this case January 1st and April 5th), so the absolute numbers are of only curiosity value: it is the relative differences that are interesting!
Major Markets (in local currency terms)
| S&P 500 | +10.2% |
| FTSE 100 | +4% |
| FTSE 250 | +7% |
| NASDAQ | +8% |
| EuroStoxx 50 | +11.8% |
| TOPIX (Japan) | +8.8% |
| MSCI World Growth (USD) | -0.6% |
| MSCI World Value (USD | +4% |
| Sterling Index (relative to a basket of currencies) | +2.2% |
This suggests that we should all have made money so far this year but that some of our returns as UK investors in overseas assets will have been dented by the revaluation up of Sterling which makes investments in other currencies worth less.
Funds
I checked out a few funds that I own, know well or which are representative to see if the above index data was reflected in performance, due to asset class selection (or asset mix for multi asset funds) or manager stock selection. This data is for the cheapest retail share class and in Sterling terms, so allows for the currency headwind where applicable.
| MAN GLG UK Undervalued Assets | +7.4% |
| Artemis UK Smaller Companies | +13.5% |
| Baillie Gifford Global Discovery | -4.3% |
| Fundsmith Equity | +1.2% |
| Blue Whale Growth | -1.8% |
| Vanguard Lifestrategy 60 | +1.5% |
| Vanguard Lifestrategy 100 | +5.1% |
| Royal London Sustainable Managed | -2.5% |
| Wisdom Tree Gold ETF | -10% |
What do you make of that?
I draw these conclusions:
- The UK has been a good place to invest this year (and indeed at the end of last year), holding its own for the first time since the Brexit vote. There is no currency headwind as there is for most other assets listed, so the UK, especially away from big foreign currency earners in the FTSE100 is more or less top of the pile. Of course, this is not a comprehensive list, but one I arbitrarily decided was interesting, abusing my editorial authority!
- There are hints that investors have fallen out of love with some of the leading growth stocks as owned by Baillie Gifford and to a lesser extent by Fundsmith and Blue Whale.
- The fixed interest element in the Royal London Multi Asset Sustainable fund has seriously dented performance. Indeed, as I have been saying for a while, fixed income investments are more risky at the moment than their long term volatility averages would suggest. This can also be seen in the difference between the returns from the Vanguard Lifestratgy 60% equity and 100% equity funds.
Do I conclude that I should be piling loads more money into UK smaller company funds and dumping my global growth assets? Of course not in such a simplistic way – only a very naive investor chases recent past performance. In any case, this data tells us nothing about systemic risk and that is still at a high level.
When markets sell off in a crisis, virtually all stock market assets fall and those that went up the most recently will usually fall the most!
So, I am as careful now about the amount of equity risk I am carrying as I have been for the last 2 years or so. The data above does validate my decision to use cash as opposed to general fixed income assets as my insurance policy. My decision to also use gold to a degree is open to challenge on the basis of recent losses, but I am sticking with that as a long term defensive asset with inflation proofing thrown in.
Of course, one has to be invested in equities to make money long term and it is possible to diversify in lots of ways within any equity asset allocation. Working out where markets are going is therefore worth the effort and looking at data like that above is part of the process. Markets are traded and priced on the back of human behaviour in my strong opinion, so it can be instructive to see what our fellow investors are up to!
Past performance is not a guide to the future as the regulators expect us to be told but recent past performance does tell us what investors recently chose to buy in the market conditions that we know about and which may well still prevail.
The fact that a fast car was travelling at 150 mph on the autobahn 4 hours ago does not really help the driver if he is in a traffic jam in the city or broken down with an overheated engine! But the driver might have avoided either problem if he paid attention to current data: the traffic info on his Satnav or Google and his car’s temperature gauge or the electronic equivalent.
In a sense recent past performance is informative even if not predictive. Use such data carefully, applying it to what you already know about the context and you will become a better investor.
