Don’t let 10% letters blow you off course

Many of us will feel a bit fatigued after 2018. Most asset classes fell to varying degrees and we saw the painful return of volatility. If you are a sterling investor, and most reading this are, then you had the added uncertainty of a currency buffeted by world opinion on the likely outcome of Brexit.

We were discussing this in the office last week. I made the point that actually 2018 was pretty unremarkable compared with the period from March 2000 until the end of 2002. Those three years were the most difficult of my career. Equity markets ground lower day after day, week after week and month after month. Towards the end I was seriously wondering if I wanted to continue in investments.

In those days I was running segregated mandates rather than funds, which meant much more direct client contact. I was constantly trying to reassure them and, at times, had to react to some quite cutting observations about my abilities and parentage! Losing money is a visceral thing, it really is a gut pain. And the person losing that money on your behalf (while charging a fee no less) tends to be a handy focal point for that anxiety and anger.

In 2003 I moved from private clients and charities to managing funds. I wanted to set strategy rather than rely on others. I wanted to work on designed funds that focused on absolute risk rather than relative, as I felt this was more aligned to investors’ reactions to losses. The Rathbone Multi-Asset Portfolio Funds are the latest versions of those strategies.

I have never forgotten my earlier experiences, however. All the funds I am responsible for lost money last year. Total Return was down 1.7%, Strategic Growth -4.0%, Strat Income -3.6% and Enhanced Growth –6.4%. I hope my investors think that these results, in the context of the gruelling market background, are in line with their expectations. I hope they haven’t caused undue stress (certainly that is the feedback we have received so far); nevertheless I appreciate the worry losses bring.

I don’t know if markets will be positive in 2019 or whether we will see a repeat of last year. As I write this, US President Donald Trump is still tweeting and Brexit is still a mess. However, there was a significant de-rating in equity markets last year, so as long as the world avoids recession (and I believe it will) I remain optimistic for the prospects of businesses that continue to evolve and improve themselves amid an ever faster pace of technological progress.

To this end we have been adding to our holdings in companies with strong franchises and reliable earnings growth. This doesn’t mean buying ‘growth’ en bloc . As mentioned before, we believe in Alphabet, but not Apple; Adobe, not Facebook.

We are using the greater volatility to purchase companies we think are promising on a five-year view. We try to avoid the emotion of short-term price movements and instead use them to our advantage: some days we find the companies we liked yesterday selling for 10% less. If we are wrong and the global economy does enter recession, we believe our safe havens – gold, yen, Swiss francs, Aussie government bonds, etc – will mitigate the worst losses again, just as they did in 2018.

It’s always hard to increase risk when you are surrounded by uncertainty and negative sentiment. But often it is the right thing to do, as prices are lower. So we are. We did not lose too much last year, so we don’t have to take excessive risk to claw back returns. Rather we are increasing risk a little to maximise the potential opportunities out there.