In a world of my own

Bear markets are taking their toll. Our head of multi-asset investments, David Coombs, explains how his team are trying to protect portfolios and prepare for a better future.

17 August 2022

“SO, YES OR NO!!!!?”

I look up. Tracey is looking pointedly at me. Or is that exasperatedly? Or Angry? Or all three …

Now I have a dilemma. Do I guess yes or no? This is not without risk. If I say yes, I could at best end up spending my weekend clothes shopping, or at worst getting a metaphorical slap for agreeing that her outfit was perhaps a bit young for her. Answer no and it will almost definitely be wrong as the answer to your partner has to mostly be yes if you aim for a quiet life.

Or do I bite the bullet and admit I wasn’t listening? Another path that doesn’t normally end well. If she was an IFA she would no doubt understand my distraction. Markets roiled aggressively last week, with some arresting moves that have no doubt absorbed the attention of us all.

Facts not fear

Welcome to the world of a fund manager during a bear market. Risk does not stop at the Bloomberg screen. Your world becomes very small and is dominated by the impact of markets grinding lower day after day. Whether reading the end of day US market reports in bed or lying awake at 4am trying to think of ways to insulate your portfolios it can be difficult to mentally escape from the day job.

Now let me say very quickly: I am not looking for – nor expecting – any sympathy. No world’s smallest violins here. I’m just trying to convey how overwhelming bear markets can be.  And, if you’re not careful, they can result in emotional and irrational responses. Fund managers are human beings after all.

In our latest episode of The Sharpe End podcast, ‘Bear necessities', we discuss how we are trying to navigate the current bear market, following up a blog from February where I highlighted how discipline was the key to avoiding the temptation to let emotions take over.

It’s vital that you adopt a coherent strategy at times like this. The decisions we take in torrid markets can impact performance, both in absolute terms and versus peers, for three to five years. That pressure to get it right is never higher than during periods like right now. And it can lead to rash or impetuous decisions. If you are not careful you start to chase the market, lurching from one theme to another. That tends to end badly.

Thinking for the future

One thing I do is take more breaks from the screens and read less market commentary. Many talking heads and analysts also feel the pressure I alluded to and start to hunker down into career-protection mode. Recommendations become more and more negative as standing out from the crowd is unappealing. Stock target prices come tumbling down, often after they have, well, tumbled down.

It’s really important to try to look through the current environment, where all you can see is negative news: rising interest rates, Chinese cities in lockdown, high inflation, war in Europe, a cost of living crisis. The list is seemingly endless. I don’t even try to put a time horizon on resolutions for this shopping list of sadness. It could be a month or 18. You simply can’t tell. We had a bear market from late 2000 through to early 2003. Yet in 1989 – a time pretty similar to ours in terms of rocking asset prices – both housing and stocks – markets bounced back in roughly half the time.

Eventually there will be a catalyst for people to turn positive again (if we can – we will try to identify it) and that will flow through the economy, as confidence does, and markets will turn. In the meantime, we are focusing on what our optimal portfolios should be for when that happens. Down markets are awful, yet they do give the opportunity of lower prices to buy good assets. Over a horizon counted in years, that is extraordinarily powerful. But it can be hard to think beyond the urgent present.

So, day to day we continue to follow our process and try to preserve capital, but we are balancing that with more constructive work thinking about the ‘other side’ of this bear market. It feels much more positive and helps offset the negative pull of the crowd.

Of course, this stoicism doesn’t solve my Tracey problem. To be fair, she might see it as her husband problem. I am just going to have to be more thoughtful and considerate. But how can I when the Fed isn’t being thoughtful and considerate … whoops, there I go again.

Tune in to The Sharpe End — a multi-asset investing podcast from Rathbones. You can listen here or wherever you get your podcasts. New episodes monthly.



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