Selection Specialists Blog

Once again, the market is fixated on the prospect of the fracturing of the eurozone. The combined wisdom of the media, politicians and investment professionals seems unable to lift the fog of uncertainty. Right now, a number of unedifying prospects loom large: Greece defaulting on its remaining debt, its businesses reneging on cross-border contracts, and the very likely devaluation of a new Greek currency with its subsequent destruction of domestic wealth. Add to that the real possibility that market forces will spread the contagion throughout Europe.
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I know I keep banging on about income, but it is for good reason. Our managers keep emphasising its importance to returns, both historically and especially going forwards in what they believe will continue to be a difficult economic environment.
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 The economics team at RBS recently highlighted an astonishing statistic. Collectively, UK companies have some £754 billion in cash sitting on their balance sheets. To put that into perspective, this is equivalent to around half of the UK’s annual gross domestic product. Furthermore, this cash has roughly doubled over the last decade, with much of the growth occurring in the last four-and-a-half years i.e. since the financial crisis. And while most of this liquidity is concentrated on the balance sheets of larger companies, small and medium-sized companies have also played their part in building this mountain of cash.
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Researching the thousands of funds available to us as multi-managers represents one of our biggest challenges. Fortunately, there is help at hand. Style Research is a company that has been collecting mutual fund holding data for several years, to the point where it has now built a database covering more than 15,000 funds worldwide. This is a system that the SWIP Multi-Manager team uses to identify fund characteristics, before assessing how the funds look from a style perspective when they are blended together.
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As all football fans will know, good players don’t become bad over night. Take Wayne Rooney early last season. Did his goal drought signal he was finished? As his 26 goals this season attest to, the answer is an emphatic no. This also applies to the fund management business – even the most skilful managers, with all the experience and resources in the world, can still have an off year. We shouldn’t be surprised: how realistic is it to expect them to deliver against their peers year after year irrespective of the prevailing market conditions?
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Following last week’s blog, in which we extolled the virtues of managers with extensive industry experience, I thought it would be a good idea to add a bit more colour to our findings. We believe intuitively that experience brings benefits in decision making and that this is especially true in fund management. However, and rather frustratingly, statistics to prove or disprove this notion are few and far between.
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In many walks of life, a knee-jerk reaction is often a natural response following a period of disappointing performance – just ask any Premier League football manager.
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Of late, newspapers have seen a flurry of articles arguing that solid defensive stocks are what your portfolio needs to see it through uncertain economic times. Many of the managers we meet agree with this view. At the same time, however, there is a growing feeling that a defensive bias could be in danger of becoming a consensus trade…
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During most of 2011, major US market indices were highly sensitive to developments within Europe. However, following four consecutive months of improving economic data, it appears that US investors have started looking inwardly once again.
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Just before Christmas I blogged of the team’s bias to a more balanced approach to our equity investments, and the positive returns available from well-positioned equity income managers during 2011. In the end, the UK market was “only” down by 3.5%. Given what was thrown at it, that didn’t seem too bad a result! The return of the UK market owes a lot to income, as on a capital basis the market was down a more galling 6.7%.
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Well that wasn’t supposed to happen.

Having enjoyed a “Santa rally” at the end of 2010, the FTSE 100 started last year at around 5,900. Many investment houses were in a bullish mood, predicting 10% to 15% gains in 2011, albeit with some volatility. And why not? The markets had proved resilient during 2010 and despite the uncertainty caused by ”The Arab Spring” at the start of 2011 the FTSE 100 broke through 6,000 during February. Further proof of the market’s resilience came after the Japanese earthquake and tsunami in March. After falling below 5,600, the FTSE again broke through the 6000 barrier by the end of the month. But that was as good as it got for the rest of 2011, despite the fact that companies across the globe are in pretty good shape.
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It’s not been a good year for UK equity investors. The FTSE All-Share was down nearly 7% on the year at the end of last week (16.12.11). But this figure masks huge volatility and market swings throughout 2011, influenced by macroeconomic events that the market found difficult to price efficiently. These included the Japanese tsunami, the Arab Spring, political wrangles over the US debt ceiling and the European sovereign debt crisis.
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It’s been a year when even the very best of fund managers - such as Tom Dobell at M&G, Anthony Bolton at Fidelity and Bill Gross at Pimco - have failed to keep up with market benchmarks. Accordingly, investors are right to express concern about the role of active fund managers. Can they really expect an individual to be able to consistently deliver excess returns? Sadly, but not surprisingly, individuals cannot always get it right. Just as we have seen in the past, there are some years where active managers simply cannot foresee events and so deliver poorer numbers.
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Given the uncertainty in the market, it was good to get some clarification this week from the IMA, after several months of discussing the change to the IMA sector classifications for the Active Managed, Balanced Managed and Cautious Managed. Instead of their preference for letters (A, B, C and D), the IMA have decided to follow the ABI classification (as per below). We believe that in this instance, words give more meaning than letters, but continue to feel that it would make more sense to actually question the rationale behind each investment type.
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I was fortunate to be invited to an investment conference in Berlin last week. It was a huge event – 30 fund management groups representing 15 asset classes, presenting to 160 delegates from 28 countries on three continents.
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These are extraordinary times to be an investor. The eurozone debt crisis is dominating sentiment, with the risk-on / risk-off trade continuing. The European Central Bank’s decision to cut rates was a positive; however, it is sticking to the script and, even though bond yields are moving to financially unsustainable levels, a massive dose of quantitative easing looks highly unlikely. But the risks in the market are well-known, and clearly reflected in equity valuations. Corporate results have generally been good, while company balance sheets remain strong. And, given the current macroeconomic uncertainty, interest rates will continue to stay lower for longer. As we can see from the from the chart below, market volatility has risen. The difference between the high and low points of the FTSE has exceeded 1% for the last 77 consecutive days.
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The heightened volatility that we are seeing in markets today only goes to reinforce that things aren’t quite right and that the medicine taken so far has taken little effect, or simply wasn’t strong to cure the ailment. Over the last few months we have seen slowly a gathering list of ‘unthinkables’, or sacred cows slain. These range from the Eurozone debt crisis where three sovereign issuers now have junk status, EU officials flying to China to ask for financial assistance, Switzerland a long term safe haven taking active action to discourage further inward flights of capital, a rating agency downgrade of US Treasuries, and near technical default of US debt, just to name a few.
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Yesterday, I started writing a blog about the stock market rally in October. It mentioned the technical indicators discussed below as a reason to be positive on the markets till the end of the year.
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Asian companies have long been beneficiaries of globalisation. It opened up vast – and profitable – new markets to the region’s manufacturers. But globalisation is a two-way street; the integration of economies and capital markets means that if the US (or Europe) sneezes, Asia catches a cold. Sadly, both regions are exhibiting flu-like symptoms…
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Who could blame investors for being a little dazed and uncertain in current markets? One day, things are optimistic: shares are up, currencies strengthen, and yields improve on UK Treasuries. But the next day, out come the bears: global growth slows, Europe holds crisis talks, and civil unrest breaks out somewhere.
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As always at our monthly asset allocation meeting, we have been focusing on where the opportunities are at the moment. But this is particularly difficult given the large number of unknowns currently troubling investors. The top three: Is there a credible solution to Europe’s debt crisis? Can the US return to meaningful growth to help solve its own problems? And can China’s economy land softly? Amid such major uncertainties, our aim is not only to grow the real value of our client’s investment but also to protect capital as much as we can.Read more

 Attending a fund manager’s presentation the other night, I was interested to hear his thoughts on the current market environment, especially as he considers himself a bottom-up stock-picker. He is frequently asked what impact the current macroeconomic environment has on his long-term view. To which he always replies, as you would expect, ”Not much at all.”
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Over the last couple of weeks, I’ve met with many investors who have been asking me about two main topics: the debt difficulties in Greece and the eurozone and the future direction of the price of gold. The latter has become a hot topic – so much so that, as I warned investors last week, it means we could be closing in on the top price. Certainly one should tread carefully; the yellow metal is beginning to feel like bubble territory.
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There’s no getting away from it. The last few weeks have been grim for most investors, with a swell tide of negative sentiment sweeping markets downward. The old adage of “Sell in May and go away, come back on St. Leger Day”, wouldn’t have helped this year. True, exiting the market in May might have been helpful – but returning in early September would have hurt.
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Government bonds from G7 countries are viewed as low-risk investments. Although governments should not go bust (i.e. in nominal terms, they should be able to fulfil their promises), inflation does erode the value of their public debt.
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Well that wasn’t very pleasant. August was a horrible month for equities. In sterling terms, the FTSE All-Share index was down 6.9%, while the S&P 500 lost 4.7% and Japan’s Topix fell 6.8%. Europe ex-UK was the big loser, falling 10.8%. Even Asia and emerging markets, whose economic situations are stronger in relative terms, fell by 7.8% and 9.9% respectively.
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Looking at the screens this morning it’s nice to see most of the FTSE 100 constituents in blue. This is something of a relief compared to the tail end of last week, when the screens were a sea of red.
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You put your left arm in, your left arm out
In out, you shake it all about
You do the Hokey Cokey and you turn around
That's what it's all about……

With 2012 fast approaching, advisers’ minds are becoming even more focused on adapting their business models in advance of the RDR deadline.
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Following the sharp sell-off of global equity markets that has taken them into correction territory, we’ve been pestering our managers for their thoughts and reactions. Among income managers, there is disappointment with investor reaction to events that, frankly, have been known about for a long time. Markets normally anticipate events but at the moment they are proving unusually reactionary. One manager believes that the market’s current behaviour is not an inflection point, and his central case – anaemic growth, with the economy muddling along – is unchanged. But events of the past week have increased the chances of an unexpected surprise of one variety or another.
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One of the many lessons we learn and often chose to ignore or forget about in the investment world is to focus on the issues which are not in the headlines. Take deflation for example - can we find anyone focusing on it or any press headlines on the matter? Well no, except one voice last week, an outstandng fund manager with the tendency to be very early in his positioning and has a habit of spotting trends / threats before the market shifts its focus.
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Looking up the number 30 has produced some odd things; none of which I can substantiate except the last one
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"Oh my ears and whiskers, how late it's getting!" - White Rabbit

The current western political climate has come to resemble something of a Mad Hatter’s tea party. Investors are right to be bemused. The United States is facing default unless politicians can agree to raise the debt ceiling by 2 August. But the mood in Washington is toxic, with Republicans, Democrats and the Tea Party – boasting more than a few Mad Hatters of their own – seemingly incapable of reaching any sort of agreement. President Obama has so-far failed to grasp the nettle; he has less than a week to prove if he is the King of Hearts or the dithering Dormouse. But the lack of leadership from both sides of The House is worrying. There is a real national discord as to what needs to be done to pull the country out of its difficulties. The world – particularly countries with US dollar-pegged currencies – nervously watches on.
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One of the questions for boutique investment houses and factors to bear in mind when investing with them is that ultimately there needs to be an exit for the owner(s) so that they can realise the value of their large stakes.
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Just a brief glance at the newspapers and television and sure enough the subject of Europe is not far away. Views on how big or small and what impact the impending insolvency issues of Greek sovereign bonds, and the likely contagion this will have on other parts of Europe, range from the sanguine to gloomy. The choice of investors considering whether or not to invest in European equities is an opaque one and reminded me of the old joke about a bunch of lost tourists who stopped a local to ask for directions to Dublin. After much frowning and scratching of his head the reply was “Well I wouldn’t start from here, but…”
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Meeting fund managers is fascinating and sometimes a little dull but continues to throw up surprises - 'Don't ask me about the short term outlook' was the opener last week from a well known UK equity manager when we sat down with him to review his fund and try and make some sense of this volatile market. Although surprised by his opening remark he does have a point - if the last few weeks are anything to go by then those attempting to gain returns from short-term trading will have found the volatility difficult and could well have found themselves getting out of equities just before the 5% bounce the week before last. In other words they have yet again demonstrated that short term trading is fraught with problems and trying to time the stock market remains extremely difficult.
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I can only admire the courage of soldiers who daily put themselves in harms way to do their day job. Whilst the consequences are in no way comparable, navigating your way through the current financial market does feel at times rather like driving across a minefield. Whilst the danger zones are sometimes obvious and in others less well visualised, the journey across from one side to the other is unlikely to be a straight one.
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I attended a very interesting investment conference earlier this month. I always find these conferences very useful as it provides the opportunity to listen to the views of a wide range of fund managers and strategists in a focused environment. Another benefit is that it provides the opportunity to speak with peers and find out how they and their clients are seeing the markets and what concerns they have.
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As the storm clouds gather over Europe and Greece in particular, it’s easy to forget how the sun is still shining on many parts of the region. In fact, so far this year the IMA Europe ex UK sector has been one of the stock market’s strongest performers.
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Inflation remains a worry for investors in 2011, particularly in the emerging markets. Years of loose monetary policy has produced inflation in developing economies, and a number of countries are addressing the issue by increasing rates. However, we are starting to hear more managers say that they believe inflationary pressures will ease in 2012.
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Unsurprisingly much of the bond markets attention is re-focusing on the USA this month, and whilst concerns over European sovereign solvency remain lurking in the background, the imminent end of Quantitative Easing 2 (QE2) is now forcing investors to contemplate about life without the wall of Federal Reserve money propping up the US Treasury Bill market. This together with the US reaching its debt ceiling in May 2011, US political parties more concerned with partisan agendas, and rating agencies nibbling away at the credit rating for US debt, has all left investors wondering whether or not the dam is about to burst and that US Treasury prices will fall.
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Investor and media focus remains towards commodities; the month of April witnessed a remarkable eighth consecutive month of positive returns in broad measures of commodity prices, averaging almost 4.5% per month. However, another asset class has been steadily showing good (but not as eye catching!) returns for investors, namely UK Commercial Property.
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Year-to-date the market remains in a narrow trading range and so far has crossed the 6000 mark (on the FTSE) 23 times.

Lead indicators on a Global basis are now also beginning to decline. Commodities have fallen sharply (the silver bubble has completely burst), and some feel that this is a healthy and normal setback shaking out the speculators sentiment.
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It is disconcerting when the press and other investors get panicky about markets and yet most times you need to avoid the herd. There has been a lot of short term noise around equities and commodities and yet those in the know are neither surprised nor panicking.

So why is that - so often it is based on what has gone before - in the case of commodities we have had a fantastic run whereby for 8 months consecutively broad commodities indices have generated returns on average of +4.5% per month or in the case of Oil 6% per month for 8 consecutive months.

Investments never move in straight lines and profit taking which inevitably is painful over the short term is healthy over the longer term as it takes some of the heat out of prices whilst markets pause for breath. Not much has changed fundamentally in the last couple of weeks and the keys that drive commodity prices, namely supply and demand still look positive. So our message is to keep the faith and top up when you see these sort of set backs.
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Yesterday was one of those slightly surreal days in the world of Multi-Manager when I found myself sharing the stage at the Mandarin Oriental with the likes of Stewart Cowley, Richard Buxton, Nigel Thomas and Angus Tulloch which was arguably the strongest line-up of speakers seen on any stage in the UK over the last decade and quite a coupe for the inaugural Event-Hub conference. For us, these guys are simply delightful individuals who have both a refreshing approach as well as great insight into markets and companies which many aspire to, but few achieve. Not many events will see you looking at the life cycle of a fund manager who started life in a council house in the North East, to a first job in a smelting plant in Redcar to Oxford University before moving onto Wall Street and then the City. So not a typical fund manager but possibly a background that enables independent thought and a view of the city and the markets not shared by many - this independence of thought and their long-term focus means they are ideal candidates for our portfolios.
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Since returning from the bank holiday weekend commodities seem to have taken even more of the headlines, if that's possible! This culminated with oil prices falling by a record margin overnight as concerns over the strength of the global economic recovery sparked the biggest sell off across the commodities sector in two years. Weaker than expected jobs data in the US and decisions in the UK and Europe to keep interest rates on hold combined yesterday to have a devastating impact on a range of commodity prices with the price of Brent crude falling $12 to just above $109 a barrel.
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I was interested to read the Q1 sales report from Cofunds this week. Cautious Managed funds accounted for 34% of net sales an increase of 3% on the previous quarter, making it the best ever quarter on the platform. Multi-Manager Funds were a big driver of these sales, with many multi-manager funds in the sector ranking as the most popular funds.
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An interesting piece by Mark Harries that appeared in Investment Week on selecting managers with tried and tested experience rather than trying to call the next ‘big’ name. The article also delves into how the team manage their portfolios
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A clearly dreadful sequence of events is being revealed by the hour from Japan at a time of general unrest in parts of the Middle East and Africa and many investors and traders have either sold out of equities and commodities or panicked and sold their holdings right down.

As usual with these sorts of events the markets initially react by aggressively marking down equity prices, while trying to quantify such events; and bonds rally, while the short-term traders panic themselves about what might be on the horizon.
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Investors have had lots to worry about during 2010 with double dip recessions, elections, public sectors cuts, job losses and the turmoil in the European Union with Greece, Ireland, Spain and Portugal (jokingly referred to as the ‘PIGS’) amongst the highlights. On the corporate front the greatest anxiety must have been felt in the boardroom at BP post the Deepwater Horizon oil rig explosion in April which killed 11 men and resulted in the spillage of some 60,000 barrels a day of oil into the Gulf of Mexico. If you had ignored markets through the year and were therefore unaware of the month by month turmoil you could easily be forgiven for thinking it was simply an ordinary year in markets with the FTSE All Share UK equity index rising some 14% whilst the ML Non Gilts Corporate Bond Index appreciated approximately 7%. But these headline numbers disguised whipsawing markets with at least two periods of real anguish in February and July, both of which turned out to be false alarms for the investment markets.
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The key question for risk assets in 2011 is whether the wall of liquidity from QE2 drives markets higher or whether the global recovery fades, be it on sovereign debt issues, concerns about Chinese inflation or a slowdown in other Emerging Markets. We broadly agree with the industry consensus that global GDP growth will increase in 2011. However the macro debate will continue causing periods of volatility and uncertainty. The corporate sector seems set for another good year. Global growth will continue throughout 2011 – remaining healthy despite all the gloom in the west giving some prospect for corporate revenue expansion; cashflows remain strong; and mergers and acquisitions are likely to be an increasing feature. As such, we will be overweight in equities and commodities in the early part of 2011
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