Rolling with the devil

My stepfather once drunkenly claimed he won the infamous Double Gloucester cheese-rolling race.

For the uninitiated, this event consists of a bunch of brave idiots chasing a round cheese down a very steep hill with hilariously painful results. Of course, along came Health and Safety to shut down the event, consigning it to the annals of history (or more accurately, I believe, shadowy and illegal underworld management). It’s only a matter of time till the fun police throws cold water on Halloween and Bonfire Night too, so make the most of it while you still can. We’ll be reduced to Netflixing and twirling sad sparklers – if we are lucky.

On a recent visit to southern Spain, I stumbled upon a local fiesta to which Health and Safety had not got the invite. By day, sozzled youths spent the afternoon narrowly avoiding charging bulls (mostly); no helmets in sight. By night, fireworks and bonfires on the beach were capped by the Great Fire Run. This relatively psychedelic experience sees locals dressed as freakish devils walking the streets spraying flares and fireworks over/on the public. Much like the bull running, the aim seems to be to get as close to the sparks as possible; there are no barriers keeping people back, the Spanish take a more “at your own risk” approach. Despite the mild weather, the locals are largely covered from head to toe. They’ve done this before. It’s fire, there’s risk, they take precautions. Contrast this with the handful of tourists in their shorts and short sleeves, compounding their sunburn as the odd spark lingers and burns the skin.

Halfway through this year, a colleague of mine remarked on how a private client had noted his disappointment at the low-single digit returns his portfolio had produced in 2018. Anyone running a multi-asset portfolio this year will know that the only game in town for the first six months of the year was equities, and more specifically US equities. I felt this client’s sentiment was an indication that risk/return expectations were starting to get skewed after several fantastic years for investors. While I’m sure many managers wished they had more exposure to equities, it is important not to forget that they are a risky asset and it is important to be diversified. As we are seeing now. David Coombs has noted before that October can be a wobbly time for markets. This year has proved the rule once again.

We have spent much of this year adding layers of protection to the portfolios so that when sparks flew we would (hopefully) not get too badly hurt. Gold, Australian government bonds and put options to name a few. We have tried to build a basket of protective assets on the fear that traditional safe haven assets might not provide the protection that they have historically because of very low yields. In fact, having more in cash than traditional fixed income has helped performance this year.

Of course rather than go to the fiesta, you could just stay safely holed up at home and miss the fun, with your cash in the bank. But we think that won’t help our investors get where they need to be in the future. That’s why we’re still skewed towards – and buying when prices slip – equities, particularly American ones with strong growth prospects and tough balance sheets. We don’t want to sit out the fiesta, we’re just making sure we’re wearing a long sleeved top and some glasses.

For those that are going to get amongst it in a singlet and shorts, you have to accept that at some point there’s every chance you are going to get burnt.