It was March 2022. Russia had just invaded Ukraine sending energy costs, commodity prices and general inflation soaring. Stock markets were 10% down and had another 10% or so yet to fall. And I walked into Finsbury Circus for my first day as chief investment officer for Rathbone Funds.
The nine months that followed were some of the wildest of my 25 years in the City. UK inflation topped 11%, central banks increased interest rates at an unprecedented pace, and stocks and bonds globally posted double-digit losses (in dollars) for the first time ever. British investors were protected from the worst of these falls; losses in sterling terms were only in the mid-single-digits. However, that buffer was because of a precipitous 11% fall in the pound against the dollar and a 6% drop against the euro.
Nowhere to hide
You can forgive me for wondering if I was going to find my new fund managers hunkering down under their desks! I’m proud to say I did not.
We have a lot of experienced investors here – veteran managers such as James Thompson, Bryn Jones, David Coombs and Carl Stick have all been running funds for 20, 25 years plus. There was no sense of panic as markets fell. Instead, there were lots of discussions across the business on how markets might play out, as these guys had seen upheaval before, across numerous cycles, booms and busts.
Not only were there healthy internal debates, but all our fund managers wanted to turn the conversation outward as well. They believed it was crucial to keep their clients informed about what was going on and what they were doing about it. None of them was keeping a low profile.
It’s obviously a difficult time to join any team when there’s so much market turbulence, yet it was especially so as my long-serving predecessor, Julian Chillingworth, had been such a calming influence for the investment teams over the past 20 years. But you learn a lot about people in adverse conditions, so it’s been great to see the strong investment culture of the firm shine through.
Everyone remained focused on delivering over the medium to longer term, with no knee-jerk reactions to the newsflow on inflation, interest rate rises and the rest. That’s not to say they sat on their hands – indeed quite the opposite. The business and macro-economic environment had clearly changed and meant a reappraisal of which companies are likely to do well over the coming years and what valuations are appropriate in a higher-rate environment.
A new era
Last year marked the end of a long era of interest rates at or below zero, which had allowed companies to raise money without the discipline of needing to make a return. While the speed at which rates have normalised was extremely painful, bringing rates back to a more normal level should make businesses more efficient and precise about their investments.
It was also the year in which the energy crisis, fuelled by Europe’s dependency on Russian gas, made us all realise that weaning ourselves from fossil fuels and shifting to cleaner power – while essential – will be not only expensive, but also a bumpy road.
As for 2023, I’m hopeful that the generally terrible expectations proliferating at its outset will contrive to usher in some rays of positivity. We investors are intrinsically an optimistic bunch – you have to be if you’re going to pay away money today in expectation of something better in the future. And I think the global economy should be able to right itself after a year of great strain – albeit there’s likely to be a shallow recession to come first.
Every market rally in 2022 was snuffed out by a surprising piece of negative newsflow. Investors have become conditioned to expect bad news, so they have positioned themselves accordingly: they hold lots of cash or overwhelmingly own defensive areas of the market. A bit of stability in economic data or even a positive surprise or two could see sentiment change quite noticeably. We’ve already seen the power of this in the first month of the year with a rapid rise in global stock prices.
I believe interest rates aren’t going back to the extraordinary lows of the last decade, but that’s actually a good thing for global economies once we get through the readjustment. Capital should have a cost and investors should therefore receive a proper return.
I think we’re re-entering a more normal environment – probably one where economic cycles are more pronounced. That means proper understanding of a company’s business model, its capital structure and cashflows, and a greater attention to the price you pay, will return to the fore. A rising tide floated a lot of boats over the past decade, it will be interesting to see which ones are truly seaworthy in these choppier waters.
I expect that the experience of our investment teams, allied to their fundamental analysis and longer-term thinking, will be a big advantage for us in the coming years. To help them with their work, we’ve rolled out new investment systems to make portfolio management and trading as efficient as possible and to provide better and more timely data. We also outsourced our dealing to ensure our fund managers have access to the best pricing and liquidity. Small, incremental changes, that are all designed to improve returns for clients either directly or by freeing up time for the fund managers to focus on researching investment ideas.
I’m excited about what the next year at Rathbone Funds will bring.
