The Dangers of Investing Using the Rear-view Mirror

IBOSS | The Dangers of Investing Using the Rear-view Mirror

Genuine inflection points in markets occur relatively infrequently, but when they do, investing via the rear-view mirror could lead investors into making some extremely poor decisions and at precisely the wrong times. The recent release of a well-publicised report, exposing the poor performance of certain funds, has given us concerns that this scenario could potentially occur for investors during the current market climate.

Recent investment strategies

In recent times, technology and other similar momentum stocks have offered investors very generous returns. For this reason, it is easy to see why so many will choose the DIY investing route. However, many investors will also have forgotten, or be unaware, of the importance of fundamentals, or even the advice a professional financial adviser has to offer when it comes to generating long-term investment returns. But as we have already started to see, things really are starting to change across the investment landscape, and at IBOSS we have been saying for a while – we think the next 10 years, and what will work successfully for investors, is going to look very different from the last.

For much of the past decade, strategies such as ‘buying the dip’, ‘running your winners’ and ‘momentum investing’ have worked incredibly well. The tailwinds of super-easy monetary policy, tax giveaways and an unofficial, but hardly secret, US central bank commitment to not raising interest rates combined to power equity markets higher and bond yields lower.

Once the potential magnitude of the pandemic on economies became apparent, governments across the globe reacted with yet more liquidity and emergency fiscal measures. After a brief but brutal retracement in markets, the global authority’s response had the effect of reinforcing the investment case of growth over value, coupled with the new working from home stock champions. These stocks were often the same ones that had already benefitted from the low-interest-rate environment and retail clients, especially in the US, piled into these momentum plays on an unprecedented scale.

Cracks starting to appear

The first cracks in the strategies, such as ‘buying the dip’ etc. surfaced with the vaccine breakthrough in Q4 2020. The first losers were the retail darlings such as Zoom, whose share price peaked at 478, having been circa 100 pre-pandemic. Much of the flows were unadvised retail clients with little or no attention paid to the balance sheet, the business model, or the company’s future profitability.

While some of these smaller tech, growth-oriented stocks started to falter, many larger ones continued to perform well. After all, through most of 2021, inflation was allegedly transitory and interest rates were going nowhere fast. Value managers, and in particular income managers, continued to be under relentless relative pressure against their growth peers. It was difficult for multi-asset managers to allocate to value and income funds as the performance tables looked positively dreadful on a comparable basis. To sum up this period – investing using the rear-view mirror had been working just fine overall and for growth investing, with the limited exceptions of some working from home stocks, it was business as usual.

The turning point

Then came a speech from Fed chair Jerome Powell, and almost instantly, the investing landscape started to change. In his words it was – “time to retire the word transitory.” He had finally acknowledged the ever-higher inflation prints and the need to raise interest rates. Other Fed speakers joined in with the usual carefully coordinated and choreographed speeches and very quickly there was a palpable increased sense of urgency, as the macroeconomists for many countries underestimated each successive inflation print and input price level. Even Christine Lagarde at the ECB had to rip up her December script on interest rates rises and the new era had dawned. The last strategy you have needed to employ since the first week of December 2021, is one based on performance pre 08/12/2021. Stocks, funds and even whole fund houses found themselves in a new paradigm since.

As previously mentioned, genuine inflection points in markets occur relatively infrequently, but when they do, the use of the rear-view mirror can lead investors to making some extremely poor decisions. The stocks and funds that are now currently outperforming, are the very same value and income ones that have recently been criticised and highlighted as serial poor performers. We would highlight funds such as the JPM US Equity Income fund and Fidelity Global Dividend funds as being the kind of funds that are full of relatively attractive value stocks, and which should continue to benefit in the economic environment we expect to be sustained for the foreseeable future.

At the same time there is much talk about the US being generally overvalued, but a quick glance at some of the value funds shows they never got to the eye -watering levels of some of their growth peers. We would highlight M&G North American Value as a case in point.

Moving forwards

Many of the previous darlings of the investment world, which looked so good in the backward-looking performance tables, and were hoovering up assets like never before, have now come under severe and constant performance pressure. From the client feedback our advisers are receiving, it seems that they are also concerned that markets have gone through an inflection point. It is at times like this, we believe, it is not only important to be aware that times have changed but also communication to clients of what is happening will be more important than ever.

For the last few years, it has often been relatively easy for clients to use stock momentum to make significant gains in global markets and often without the aid of an adviser. It seems that in this new investment world, which is post ‘transitory’, the coming months and years will provide a significant opportunity for advisers to demonstrate the value of their advice. Nothing is ever certain in investing, but it feels like the era of rear-view mirror investing is perhaps over and that a more considered approach which takes old fashioned values, like profit and a good business model, will come back to the fore and a genuine diversification of assets will be rewarded.

 

This communication is designed for professional financial advisers only and is not approved for direct marketing with individual clients. These investments are not suitable for everyone, and you should obtain expert advice from a professional financial adviser. Please note that the content is based on the author’s opinion at the time of writing/publish date. Our views and opinions regarding certain investment themes and topics can alter over time as the macroeconomic background changes and other industry news is made publicly available, this is not intended as investment advice.

Past performance is not a reliable indicator of future performance. The value of investments and the income derived from them can fall as well as rise, and investors may get back less than they invested.

IBOSS Asset Management is authorised and regulated by the Financial Conduct Authority. Financial Services Register Number 697866.

IBOSS Limited (Portfolio Management Service) is a non-regulated organisation and provides model portfolio research and outsourced white labelling administration service to support IFA firms, it is owned by the same group, Kingswood Holding Limited who own IBOSS Asset Management Limited.

Registered Office is the same: 2 Sceptre House, Hornbeam Square North, Harrogate, HG2 8PB. Registered in England No: 6427223.

IAM 62.2.22