Stay On Board Through Market Cycles
In this age of limitless, instantaneous information, it is increasingly difficult to focus on the things that really matter to long-term investment returns. NICK CURTIN revisits the importance of remaining invested through market cycles.
News channels bombard us with “breaking news” headlines — war with North Korea, peace with North Korea; détente with China, trade war with China; Brexit on, Brexit off; Zuma despair, Ramaphosa euphoria. And so it goes. Although such short-term details can’t be ignored, it is more important to comprehend their implications for long-term cycles.
History is replete with examples of economic cycles that drive investment markets. In his book Time in the Markets, Dave Foord wrote: “Standing in the way of market cycles, you will not only suffer the ignominy of King Canute but you will do yourself serious financial harm.”
Thus, the ability to identify and understand these economic cycles is essential to successfully managing investment risks and achieving long-term, inflation-beating returns. As your investment manager, this has been our job for more than three decades. Staying invested through these inevitable cycles is the most important thing that investors must do. There is no starting point and no finish line for long-term savings.
Correctly assessing market cycles is crucial to Foord’s investment process, providing the most attractive investment opportunities and almost certainly the most important risk management imperatives. An example is the steadily rising local and global investment risks that have not fazed the market. While Foord’s portfolios in the last two years moved to a decidedly cautious position (especially in SA assets), globally markets have charged ahead, buoyed by synchronised economic growth, US tax cuts and promises of large fiscal stimulus in the US. The giddy mood so typical of late-cycle rallies is all too evident.
In recent months, however, some sobriety has returned. Interest rates are firmly in a rising cycle, core inflation is on the up and various geopolitical flashpoints have resurfaced. Emerging markets have quickly fallen from grace. But while market cycles are unstoppable, fickle and ruthless, we would not be surprised to see a dramatic further move up as the bulls refuse to die. In the words of the famous investor John Templeton, “Bull markets are born on pessimism, grow on scepticism, mature on optimism and die of euphoria.”
In South Africa, Ramaphoria is fading as the economic realities hit home. Despite the massive sentiment rally, the economy shrank in the first three months of the year. The rand, one of the world’s strongest currencies in 2017, has come unstuck as distressed public finances and foreign funding withdrawal conspired to reveal its true vulnerabilities.
SA Inc. companies face increasing headwinds despite the optimistic “new dawn.” Although political developments are undoubtedly positive, the new president has no magic wand — the fixes will take years in the best-case scenario. Most of the economic realities that we have warned about in the last two years are now starting to become visible and the markets do not like what they see.
Simply hoping things will improve has never been a sound investment strategy. Foord’s portfolios, however, are very well positioned for the unfolding conditions by focusing on investment ideas with the highest certainty of return in these more challenging market conditions.
Outperformance during such environments is what you should expect from Foord given our long-term “through-the-cycle” investment philosophy. The Foord Balanced and Foord Conservative Funds, having suffered below-average relative returns for some time due to the cautious positioning, were pleasingly provisionally ranked near the top of their respective sectors this quarter and on a year-to-date basis.