JP's Journal: I'm sorry I haven't a clue

I’m sorry I haven’t a clue is not a good response to hear from your fund manager. But the reality is that we make decisions based upon imperfect information. In today’s world there is increasing data availability and one of the key challenges is how to process this information to make better decisions.

A lot of money is being spent on technology that can process data quickly, that would take the human brain much longer to evaluate. Does that mean fund managers will be replaced by data scientists?

The answer is not clear. What we are doing within the Fixed Income team at RLAM is seeing how we should address these issues from the perspective of credit markets. The universe of potential investments in credit is massive – much larger than the range in equity markets. A single issuer may have multiple credit securities to choose from with a myriad of different features – not just coupon and maturity but also form (bond or loan), seniority (where in the capital structure the bond sits), covenants (legally enforceable features) and liquidity. So, it is a real challenge to distil the potential universe into a manageable size.

So how are we doing this? We are adding to resources that will help analyse information – not just credit analysts but looking at how we use data more effectively. That will mean more focus on screening and using data in a different way. A great example of evolution here is how we use data to help manage our sustainable credit strategies. RLAM’s Responsible Investment team has developed a dashboard that helps us evaluate ESG and climate factors. Yes, this does take more analysts but it also needs a lot of data input.

However, I don’t think fund managers are redundant yet and it would be wrong to assume that more information necessarily leads to better investment outcomes. Doubt is often seen as a weakness in decision makers. However, I think it is a critical feature required by fund managers and there is a risk that information availability undermines the question “what if I am wrong?”. Fund managers should acknowledge that we don’t have perfect foresight. To address this requires good people around to challenge, a flexible mind-set that can react to events but one that is not driven off course by peripheral noise, and an investment process that build in protections.

What does this mean for our sterling credit strategies, for example? Active management but a significant diversification of sector and issuer risk, getting close to the assets of a company where possible, and a focused approach on those areas that get overlooked by other investors.

As someone who listened to “I’m Sorry I Haven’t A Clue” on the radio for many years I was sorry to read about the death of Barry Cryer. I heard him at several evening events over the years and thought he was a wonderful comic and speaker. Sometimes, it takes bravery to admit to oneself that you don’t know. There is nothing wrong – and a lot right – with that.

Government bonds and cash

Rates markets took a breather over the week, with the focus on equities and, in particular, the sell-off in tech and growth stocks. The NASDAQ has had a torrid start to the year, down 13% year to date and equity leadership is being taken by the forgotten sectors like banks and energy. Nevertheless, there were some interesting developments over the week.

In the US the Federal Reserve said that it would soon be appropriate to raise rates, reflecting conditions in the labour market. It now looks very likely that a move in March is on the cards. Overall, their comments were hawkish with a tacit endorsement of implied market rates. Interestingly, Chairman Powell refused to rule out moving in 50bps increments. The Federal Reserve still expects inflation to fall later in 2022 as supply problems ease, but the message was that inflation is more persistent than expected.

US treasuries took this in their stride, registering little change on the week. UK 10-year yields rose towards 1.25% and German yields moved closer to zero, although still remaining at negative levels. Implied inflation softened in the US but remained elevated in the UK.

Credit

Investment grade credit markets were weak, reflecting volatility in equity markets. Since the start of the year a typical sterling credit index has widened by 7bps; subordinated financials, as usual, have been the most sensitive to heightened risk aversion but weakness was a pattern through most sectors. In high yield markets there was more significant pressure with spread reaching the levels of November.

Doubt is good as it keeps the mind active, looking for pitfalls. But there will be occasions when you have to go full throttle and back yourself. Watching Nadal’s comeback in the Australian men’s tennis final was a case in point. Two sets down against a younger opponent, Nadal would have lost if he had not had the mental resilience to believe he could win. What a great advert for sport and a great illustration of what makes a champion. Skill is vital but mental strength will be the deciding factor when opponents are equally matched.

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.