Are you a journalist or a fund manager?
One of our favourite investment adages is that if you want to be a successful journalist, be a pessimist; if you want to be a successful investor, be an optimist. For anyone wondering why the balance between happy and sad news is so in favour of the latter, the former doesn’t sell.
If we were to write a headline on markets right now it would be ‘The global economy continues to grow as innovation accelerates’. Not a bad one, but hardly click bait. If a journalist were to write a headline it would be ‘Risks rise as inflation soars and tapering begins’. For anyone invested in markets, or thinking of doing so, I suspect this would catch the eye more.
Looking back over the last decade this has perhaps been the most unloved bull market of all time. The ratio of negative to positive headlines is at least 2:1 in our experience, yet since the S&P 500 fell to 676 in the financial crisis of 2009, it has spent the last 12 years increasing more than 650% to current levels. That is a headline that certainly hasn’t been written. While there are many reasons for this, we believe innovation has been the primary driver, creating new business models and enhancing old. Of course, lower bond yields have helped, and there have been some bumps along the way, but we believe the next 12 years will be at least as fruitful for innovation to enhance the global economy and improve investment returns. In our view, this will occur whatever happens to inflation, China, energy, central bank policy and any other negative headline of the current day. If you want to be a successful investor, be an optimist.
Good COP or bad COP?
There must be some message in the flooding being seen in Scotland, which is making travel to Glasgow difficult for some for the COP26 summit on climate change. Maybe the message is we are not even in the right ballpark with respect to meeting the aim of restricting global warming to 1.5 degrees, made at the previous COP21 summit in Paris. Anyone wishing to understand why the current framework for delivering this isn’t working, and why we need to think again, could do a lot worse than read ‘Net Zero’ by Dieter Helm. A summary would be that there are too many competing agendas and cultures, and too few enforcement mechanisms for grand plans and summits to deliver 1.5 degrees.
The developing world sees climate change as the consequence of the developed world industrialising and becoming much wealthier. Why should developing countries not be allowed to do the same they say, and even worse pay the price for the climate change richer countries created? Of course, there are strong answers to this, such as we only have one planet, but the point is a fair one. Dieter makes the point that the solution to this may only partly lie with governments and politicians, and that consumers will be the bigger part of the solution by taking personal responsibility for their own choices and lifestyles. Unfortunately, up until now, many consumers have not been willing to make changes that will involve less travel, dietary changes and other behavioural pivots. Whatever the outcome of COP26, we are inclined to agree with Dieter that another, closer to home, solution may be needed.
Learnings from the third quarter results season
The end of October and the start of November marks the last time for significant corporate news, as third quarter results for companies with December year-ends roll in, as do half-year results for those with March year ends. What have we learned so far? Well, for those companies missing expectations due to supply chain problems or inflationary cost bases, their share prices have not been badly hit. This suggests equity investors agree with bond markets that supply chain issues will be resolved in due course and that inflationary pressures can be managed through productivity improvements. Those companies helping deliver those productivity improvements, in particular technology companies, are seeing huge demand for their services. As Microsoft said, digital technology is a deflationary force in an inflationary economy. There has been no let-up in the transition from the physical to the digital world, despite the unlocking of the global economy as we learn to live with Covid. This is an important point for the growth versus value debate: for those cautious on growth investing, be aware the companies in this bucket are doing that positioning no favours as they are accelerating, not slowing. Finally, the other learning is whatever problems the global economy has, they are supply, not demand, driven. Generally underlying demand in the global economy is good. These are all reasons to be optimistic.
The performance of our funds has been volatile for sure this year, but if the year had ended at the end of October it would have been a good one. Our mixed assets funds are towards the top of their peer groups and our single asset equity funds have crept back into the first quartile for the year to date (see our factsheets in the fund centre at www.rlam.co.uk for details). We have been helped in October by good stock selection, at a time when sector trends have not been helpful with the energy ‘crisis’ temporarily boosting the performance of commodity stocks, which we do not own for environmental reasons. In October, of note has been the performance of those companies we own benefiting from the transition to the digital economy, such as Intuit, Microsoft, Segro and Nvidia. These are investments whose past share price performance has already been strong, but we think they are in still relatively early on in their development compared to an economy which has in many ways only just started to digitise.
Our preference for equity over credit in our mixed asset funds, and our view not to own cash as an asset allocation decision, has also helped performance. Of course, the year has not ended yet and there could well be more volatility ahead, particularly as central banks begin the process of adding less stimulus to the global economy (the process known as tapering). Overall, in a year which has not been a natural fit for sustainable funds – the 70% rise in the price of oil for example – we are pleased with the performance of the funds.
November also sees us host the next meeting of our independent external advisory committee. As a reminder, this is a committee which oversees the implementation of our sustainable investment process, advising and challenging on a range of sustainability issues. It gives our investors reassurance that the decisions we make, often in subjective areas without precedent, meet the letter and spirit of our commitments to you. At this meeting we will be discussing recent criticism of the sustainable investment industry by people both within and outside asset management. There have been allegations of greenwashing and exaggerated claims. Nothing in our view can be above constructive criticism, and we must be openminded to listen to all those who disagree with the approach and implementation of sustainable investing. We will be asking the committee to critique both us and the asset management industry to understand where and if we need to approve.
It should be noted we have some sympathy for criticisms of funds that claim ‘impact’ when only using investors’ money to buy equity and debt from other investors. We are also of the view that superficial portfolio metrics do more harm than good as they oversimplify a complex world. Every investment we consider is its own unique puzzle that only thoughtful analysis can solve. To aggregate disparate industries and businesses up to portfolio metrics we think is a false fit for areas other than carbon and diversity, where we can get consistent numbers. Sustainable investing allows those who want to know they are invested in companies on the right side of environmental and social change to benefit from regular and long-term saving in investment markets. Well implemented, we believe it is an effective and increasingly mainstream form of investing. Those are laurels that need no further embellishment. We shall see if the committee agrees with us!
Past performance is not a reliable indicator of future results. The value of investments and the income from them is not guaranteed and may go down as well as up and investors may not get back the amount originally invested. Portfolio characteristics and holdings are subject to change without notice. The views expressed are those of the author at the date of publication unless otherwise indicated, which are subject to change, and is not investment advice.