Each generation of bright young things believes they will manage things better than their predecessors. Many realise only too late how little they knew for most of their careers The wisest get the balance right between trusting their education and driving innovation, with an acceptance that the future tends to rhyme with the past. Things might look different this time, but they generally aren’t!
The investment industry is no different. New investment techniques and tools have emerged: trades happen in the blink of an eye, news zips around the globe and algorithms are ever-subtler and more complex.
However, the best results are achieved by those willing to combine the best of the old and the new.
This is because investment markets are an almost perfect mechanism for embarrassing the most confident and luring the unwary into the same mistakes as the previous generation. The past is littered with Nobel Laureates, PhDs and high-earners who failed to heed sage advice and learnt the error of their ways through experiencing defeat first hand.
At Sarasin & Partners, we constantly welcome new talent into our firm. Over the past 24 months we have hired people with different skills and experience from abrdn, Barings, Fidelity, RBC, Vanguard and Brewin Dolphin, together with graduates from the universities of Edinburgh, Cardiff and Bristol. We constantly seek to bring in fresh ideas, while helping existing employees to develop their professional knowledge. We also travel extensively to develop our thinking by visiting companies, central bankers, policymakers and other investors.
There are, however, a few cornerstones of successful long-term investment that we suspect will outlast us all. These are tenets that each new generation of investors discovers or re-learns through lived experience – often after seeking heroic results through skill and market timing.
Don’t bail out at the bottom
The greatest protection for long-term investors is to acknowledge at the very outset that markets will be volatile. Bubbles and busts will surprise most investors when they happen, in terms of their triggers, timing and size. But while paper losses and opportunity costs might provide investors with an emotional roller coaster, permanent damage is only done if losses are crystallised. Cash that may be required over the short to medium term should not be invested in volatile or illiquid assets, and investment success should not be predicated on clever market timing.
Policymakers and investors typically find a way to ‘muddle through’, and many of the things we worry about often don’t materialise. Even bull markets climb a wall of worry. If you can spare cash for long-term investment, real assets such as equities will be your friend, even if they make the journey a little uncomfortable from time to time!
Don’t switch horses in the middle of the race
This is true whether we are talking about asset classes, investment approaches or investment managers. Many approaches take 5-7 years to prove themselves and even the most successful will disappoint for significant (18-36 months) periods. Markets can follow ‘short-term’ trends and deviate away from fundamentals for surprisingly long periods. It is always uncomfortable if one’s approach falls foul of market fashions.
It is never helpful if a partnership starts off – or ends – with weak performance. The first can pollute a relationship from the start, while the second may spoil things just as a five-year review commences. However, the desire to always be in the top quartile can encourage reckless behaviour. The worst thing a manager can do is to change tack after a period of underperformance, only for their approach to come back into favour. Likewise, asset owners can come unstuck if they switch from an underperforming manager to a star performer just before the latter enters a period of decline.
Don’t lose faith in your abilities
During rough patches it is sensible to review processes, procedures and the reasons behind performance, and to do so with a critical and objective eye. To use a sporting analogy, class is permanent but form is temporary. It is the long-run career averages that matter, not a few poor seasons in an otherwise successful long-term career.
A truly long-term investor could put all their assets in a leveraged portfolio of equities and stand a good chance of outperforming most investors over a 30-year period. Most of us, however, will need to draw on our investments – perhaps unexpectedly – long before three decades are up.
Moreover, trustees and objectives change, and even seasoned investors often lack the nerves for full-bore equity volatility or private market illiquidity. Even if some individuals do, their tenure on an investment committee is unlikely to exceed 10 years and their successors might not thank them for their legacy! Diversification between and within assets classes makes sense, even if only at the margins. A slightly lower long-term total return is, we would suggest, a price worth paying for flexibility and a smoother passage through markets.
Steady evolution, not rare revolution
New asset classes appear from time to time, as do new techniques, new methods of implementation and changes in perception of one’s domestic market. Each new idea will have appeared strange, possibly dangerous and quite probably unnecessary when it was first considered. The timing of a new idea rarely feels perfect and there never seems quite enough time for as much education as people desire. However, procrastination is rarely the precursor to success. We suggest that regular small steps result in a portfolio that evolves progressively from decade to decade. Not every step will be correct or perfectly timed, but a good manager or strategist can add significant value if allowed to nudge things along in an incremental manner.
Manage the things you can control: costs, service, your time
Future performance is unpredictable and known only after the event. However, costs can be calculated and lower costs will add absolute value. Meanwhile, strong service, well-organised meetings and clear materials can make the journey more comfortable. Ensure you pay a fair price and take service-oriented references from clients ahead of any appointment.
Distinguish between luck and judgement
The best investors and asset owners freely acknowledge the sheer number of factors that influence their decisions. In some cases, brains, hard work and deep analysis can conquer complexity, but not the known, and unknown, unknowns of investment markets. And that is before you get to irrationality, herd mentality, market momentum and pure bad luck!
Long-term success and decision-making will be enhanced if you can judge past performance accurately, but also wisely. Many investment decisions are driven by human nature and are not easily quantifiable. It is rare to have all the facts to hand before making a decision and by the time you do, the opportunity to profit has often passed. Mistakes will be made; the trick is understanding what could have been done better and how to do better next time. Sometimes, the answer will be nothing.
It is always right to strive for improvement, and for each generation of managers and asset owners to try and do things better and more efficiently than their predecessors. However, if 120 years of investment data and stories of investment hubris can teach us anything, it is that trying to add value through clever active tactics, must be underpinned by robust parameters that you always operate within.
The eight tenets above provide assets owners and managers alike with firm strategic foundations, on top of which can be added tactics to differentiate and excel. We would caution on any policy in which success was entirely predicated on being unusually clever, fast or bold. Investment is a long race that is typically won by the tortoise, even if every time the starting gun is fired, the latest and fastest hares often attract significant backing!
This document is intended for retail investors. You should not act or rely on this document but should contact your professional adviser.
This document has been issued by Sarasin & Partners LLP of Juxon House, 100 St Paul’s Churchyard, London, EC4M 8BU, a limited liability partnership registered in England and Wales with registered number OC329859, and which is authorised and regulated by the Financial Conduct Authority with firm reference number 475111.
This document has been prepared for marketing and information purposes only and is not a solicitation, or an offer to buy or sell any security. The information on which the material is based has been obtained in good faith, from sources that we believe to be reliable, but we have not independently verified such information and we make no representation or warranty, express or implied, as to its accuracy. All expressions of opinion are subject to change without notice.
This document should not be relied on for accounting, legal or tax advice, or investment recommendations. Reliance should not be placed on the views and information in this material when taking individual investment and/or strategic decisions.
The value of investments and any income derived from them can fall as well as rise and investors may not get back the amount originally invested. If investing in foreign currencies, the return in the investor’s reference currency may increase or decrease as a result of currency fluctuations. Past performance is not a reliable indicator of future results and may not be repeated. Forecasts are not a reliable indicator of future performance.
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