When reflecting on market movements over the last few weeks, writes Elliott Farley (left) of Nottingham based fund manage T Bailey, it is important for investors to understand that a fundamental principle of investing is that markets don’t always act rationally. Sometimes they get things wrong; usually they overreact in the short-term.
Often this is a good thing when managing a portfolio. Ultimately markets are self-correcting in the longer-term. As a result windows of opportunity open for the astute manager to sell when they feel assets are overpriced and buy when they feel assets are underpriced.
One of the advantages of managing a multi-asset portfolio is that it gives me the chance to switch between asset classes to maximise these opportunities.
Heading into the recent bout of turbulence we held over 17% cash in the T. Bailey Defensive Cautious Managed Fund– largely through our reluctance to allocate to the traditionally perceived safe havens of sovereign debt. With the FTSE 100 under 5000 an opportunity opened up to bring that cash down and selectively buy good equity funds (increasing US and Emerging Market exposure and buying the BlackRock Gold & General Fund – gold equities have lagged the price of gold itself, and appear to represent attractive value relative to bullion).
I am sure you will agree markets can be infuriating too. Sometimes the arguments for avoiding an asset class are screamingly obvious and yet markets persist in rewarding what can seem totally irrational.
For a long time here at T. Bailey we have had an aversion to sovereign debt – for us the risks have appeared too great for many months, and the rewards too little. And yet US treasuries, instruments recently downgraded by S&P, rode through the recent turbulence on a wave of deflationary fear with yields falling on 10 year treasuries to below 2% as their prices rose.
Similarly for UK Gilts, to invest in a low nominal yield on a term of say 10 years requires quite some confidence that inflation will be muted for the next decade, especially given current CPI of 4.5%. At the same time, UK equities are offering a historic yield on “real” assets of over 3.5%.
Of course investors in the short term are concerned that the markets could tumble further. Painful memories of 2008 have been stirred. But this is not 2008. Credit markets appear to be functioning with greater liquidity; companies are not so heavily leveraged; company inventories are not as high either. Companies that survived 2008 are leaner and fitter.
The 2008 crisis was a liquidity crisis. Banks weren’t willing to lend to each other and investors were extremely wary of leaving money with them. Now, outside of the Eurozone at least, we have the bizarre situation where the Bank of New York has told clients with more than $50m in cash to deposit that it will charge them for holding it.
Sometimes we can listen too hard trying to catch history rhyming with itself.
Longer-term investors moving into equities now could look back on this period as a good buying opportunity. And those buying sovereign debt now may live to regret it. Thus highlighting the importance of seeking high quality and professional financial advice.
It could be some time before logic is once again reflected in valuations and this forecast comes to be realised – and we could be in for more ups and downs in the meantime. That’s the enticing and infuriating way markets behave.
Elliot Farley – Fund Manager at T. Bailey Asset Management Limited.
Important Information/ Risk Warnings
This article has been produced for information purposes only and represents the views of T. Bailey Asset Management Limited (‘TBAM’) at the time of writing. It should not be construed as investment advice, and no investment decisions should be made without first seeking advice. Please note that T. Bailey Asset Management Limited do not provide financial advice to private individuals. If you have any doubt whether the T. Bailey funds are suitable for you and you wish to receive advice you should contact a financial advisor. Full details of the T. Bailey Funds, including risk warnings, are published in the T. Bailey Funds’ Simplified Prospectus. The funds are exposed to global financial markets and are therefore subject to market fluctuations and other risks inherent in such investments. The manager may enter into derivative transactions for efficient portfolio management purposes (including hedging). The value of your investment and the income derived from it can go down as well as up, and you may not get back the money you invested. Investments in overseas equities may be affected by changes in exchange rates, which would cause the value of your investment to increase or diminish. Capital appreciation in the early years will be adversely affected by the impact of any initial charges, and you should therefore regard your investment as medium to long-term. Every effort is taken to ensure the accuracy of the data in this article but no warranties are given. All sources TBAM unless otherwise stated.
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