Market timing

So what does all this volatility prove and more importantly, what does it mean for investors?

I strongly believe that investors should not attempt to time the ups and downs of market movements. It is understandable that investors are concerned about such short term fluctuations however; the only certainty is that it is impossible to predict how markets will move.

It is common for the sharpest falls and the largest gains to be concentrated into short time periods and the events of the past weeks have put into focus the extreme volatility, which can be encountered daily. For example, on one day the FTSE 100 opened at 5,041 and closed at 5,165 representing a change of +2.46% on the day. However, at various points during the day the index had reached a high of 5,176 and a low of 4,824. The maximum percentage intraday gain was +7.28% and the maximum percentage intraday loss was -5.6% demonstrating that investors taking different views on the market would have seen a 13% differential in returns on a single day. An investor, who panicked and sold out of the market at its lowest ebb of 4,824, would have lostout on in excess 10% worth of gains. Accordingly, an investor who tries to anticipate when the best time is to invest runs a very high risk of missing the best gains. This can have a big impact on their long-term return.

It is not possible for an investor to successfully predict market movements, even more so during times of extreme daily volatility like we are presently experiencing. Market timing ultimately becomes more of a gamble than a legitimate decision or strategy based on solid grounds, and for the long term investor doing nothing and remaining invested is generally the most prudent strategy.

Diversification

The past weeks have provided further evidence of the importance of a well diversified investment portfolio.

Golden Gate’s client’s exposure to risk will be reduced, as we ensure clients portfolios are spread across different sectors, asset classes and geographical locations. Assets may include fixed interest, UK equities, Fund of Hedge Funds, overseas equities, commodities, structured products and alternative investments. By achieving greater diversification, it is possible to reduce the overall vulnerability of the portfolio. By weighting clients investment in various asset classes, not only is the level of risk commensurate with personal needs and attitudes but also it is possible to optimise the potential return for any given level of risk.

Stay Focused

One investor who has not changed his opinion on the outlook for the future, despite the stock market’s drop in value over the past weeks is Invesco Perpetual’s Neil Woodford “Much of what the market is currently panicking about centres on weak growth and the ongoing sovereign debt crisis. This is not a new surprise to us. We are no more concerned about the macro environment than we have been. We have built our portfolios with these concerns in mind and remain confident that the businesses in which we are invested can survive and prosper in this environment.”

Rather than panicking, Neil, believes that the already attractively priced companies that he is invested in now look even more enticing with opportunities for income seeking investors: “Many of the companies in which we have high levels of confidence have seen their share prices fall dramatically, as on previous occasions, the market is indiscriminate. We believe this provides a very attractive investment opportunity for those prepared to take a longer term perspective, as valuations are, in my opinion, profoundly attractive, particularly in terms of cash flows. We remain very confident in our strategy and portfolio positioning.”

I particularly liked the following article from Jim Wood-Smith, Head of Research at Williams De Broe and thought I would share it with you.

“What has beautifully encapsulated the state of the world today is that Park Place, on the Thames near Henley, has been sold to a Russian for an alleged UK record price for a ‘house’ of £140m. There is one other item of equal importance, the report in the Sunday Times that the likely buyer of Northern Rock will be financed by the Chinese.

We have to remember that we live in a two-speed world. One where one half is burdened by the debts of the past, a world of health and safety legislation, inexplicable banking, low growth, public expenditure cuts, rising retirement ages, civil disorder, political putridity and bonus cultures. But also a world where the other half is thriving, entrepreneurial, resource rich, reserve rich, unconstrained by debt and fiercely aware of its own long term interests.

Nothing obsesses financial markets like the study of their own navels. We all become so utterly obsessed with finding the fluff on our own tummies that we forget that there is a ‘rest of the world’. So yes, maybe the developed world is staring at the probability of a decade or two of lower growth than we have been used to. Note that this is still growth, not stagnation or recession. But note also that the world extends beyond the City of London, and Paris, and Frankfurt, and even New York. The new money is in Moscow, Mumbai, Bangkok, Singapore, Beijing, Ulan Bator, Johannesburg, Sao Paulo and Caracas.

And so we are not panicked by the way markets have moved over the past couple of weeks. Nor by how they may act over the next fortnight. More than ever this is anyone’s guess. One of last week’s crises was allegedly triggered by the rumour that Societe Generale was in some unspecified trouble; though patently untrue this is unpleasantly reminiscent of 2008 and is showing us how fragile markets are currently. If it was Soc Gen last week, then who will it be this time? Someone in Italy maybe? Or Belgium? How about a regional German bank? Let’s forget all about the recent bank stress testing that told us in very simple terms who it is that may hit trouble and who won’t, and instead let’s just speculate that if President Zapatero has a meeting to decide the menu for his next state dinner, then it must mean that Banco Santander has just gone bust.

It is an uncomfortable truth that if markets never went mad we would never have the chance to buy mispriced assets. The very nature of this trade is that it has to feel gut-wrenchingly brave (or insane) at the time. Equity markets do not fall 10% in a week by chance. Well actually they do, and every time this happens we all see and hear terribly clever and earnest experts telling us why everything in the world is about to get very much worse. It is a cliché, but it is true that the best time to buy is when everyone else is selling.

However I digress; our bottom line is that we see slower growth in the developed world, not perpetual recession; this will permit an even greater domination of the global economy by the developing economies and global growth rates will hold up better than appears to be expected. We will not pretend that we know when or where the headline equity indices will go over the next few weeks, but we do know that if we are even half right with our analysis of trends in global wealth and wealth creation, then the falls in share prices of many companies we have seen has provided a fantastic investment opportunity”.

I hope you find this of interest. If you wish to discuss this or any other matter, please do not hesitate to contact me.

Tim

It is my goal to give my clients greater control of their finances, which I believe will enhance the chances of clients achieving their financial goals.

There is a new movement within the financial services industry, which is currently gathering momentum.  Come to the fore “Passive investing.”  In basic terms, passive investing is tracking some form of index (there are thousands to choose from).  The momentum behind passives has primarily come from the emergence of ETFs (Exchange Traded Funds).  I will not bore you with the finer details but ETFs are similar to index trackers but trade live on stock exchanges.

ETFs have hit the market with a bang and have increased dramatically the choice for an investor.  When it comes to ETFS, we are spoilt for choice.  You can buy a FTSE 100 ETF or if you are feeling a little bit more adventurous you can even buy an ETF, which tracks the price of coffee these days.  With the emergence of ETFs has come the argument that says “why would you bother with active fund managers when you can just buy the market cheaper.”

One of the arguments for passive investing is the cost of active management.  The cost of tracking an index is lower than an active fund (by around 0.8-1.2% per annum in most cases).  This is of course due to the fact you do not have the costs of the fund managers, analysts and any other costs associated with running an active fund.  The fund managers will argue that you are buying expertise whilst the passive crowd would argue that the cost of active fund managers negates returns over the long term and a fair percentage of active fund managers do not outperform anyway.  I would tend to agree with both sides of the arguments and argue why can’t you use both tools to add value to a client’s portfolio?

At Golden Gate, many of our client portfolios include passive investments but only in association with carefully selected active funds.  It is clear that holding pure passive investments can bring timing and volatility risks right to the forefront, however passives can prove valuable in areas, where it is hard to find a fund manager with a strong track record or a particular theme that can add value.  A great example of this is that one of the fund managers we use recently sold an agricultural ETF, which was an investment play on food prices.

We believe that a combination of both actives and passives is a sensible strategy.  This approach can keep a portfolio more cost effective than a truly active one whilst also giving the portfolio a strong chance of adding value to the client.  The figures often do the talking with our clients, and our clients’ portfolios keep outperforming their benchmarks, so there must be something right in what we do.

Ps.  As a side issue, if you are investing in ETFs, make sure you are actually buying an index tracker rather than a leveraged derivative as these are becoming more popular but carry with them a huge level of risk.

I hope you find this of interest. If you wish to discuss further, please do not hesitate to contact me.

Tim