Focus on value because most investors focus on outlooks and trends
This is one of many sage pieces of advice from my all-time fund management hero, Sir John Templeton, who passed away 10 years ago this month.
He was a brilliant man who established the Templeton Growth Fund in the US in 1954 which today is $13 billion in size and has produced an average annual return of nearly 12% per annum since launch.
A contrarian, long-term investor at heart, Sir John employed fundamental research rather than rely on technical or momentum based analysis. He was also a true believer in the benefits of diversification. In fact, Templeton Growth was one of the first funds to invest in Japan in the 1960s.
Quite what Sir John would think of today’s investment environment is an interesting question. I have no doubt though such an experienced investor would take it in his stride. After all he worked through numerous difficult market cycles, including the Great Depression of the 1930s.
Scratching beneath the surface, the outlook has become more uneven across sectors and economies.
Ten years on from the financial crisis, at first glance the global economy appears to have recovered rather well. Looking across all the major countries, growth this year is expected to be the best since 2011, and the big tax cutting and spending increase package from President Trump should provide a very favourable backdrop for 2019 too. However, scratching beneath the surface, the outlook has become more uneven across sectors and economies, while the risks to the cycle have increased. Business optimism across Europe has been dampened by recent events, while some of the larger emerging market economies are not reacting well to the withdrawal of dollar liquidity which the US central bank is engineering.
In particular, in its annual report published last week, the Bank for International Settlements (BIS) highlighted that increasing trade tensions or a sharp rise in bond yields in developed markets could hit growth, whilst political uncertainty and a downturn in company profits could knock investor’s appetite for risk.
This comes at a time when the quantitative easing taps that have supported asset prices for so long are starting to be gradually turned off. The BIS emphasised that various policies could work in tandem to ensure macroeconomic and financial stability while raising long-term sustainable growth. The aim is policies to strengthen the resilience of the financial system, to ensure the sustainability of public sector finances, and most important of all actions to raise productivity growth so that real incomes can rise and populist tendencies kept at bay.
The outlook for the global economy is unclear; anyone who argues otherwise is fooling themselves. This is not to say that economic forecasts, predictions and the identification of certain macro trends should be ignored. They certainly have their place in the investment process, but should not be solely relied upon when it comes to making decisions about your portfolio.
Fundamental analysis and research remains key whether it is in regards to selecting individual bonds, companies, sectors and countries, or deciding which strategies to allocate to. A disciplined approach works best – what is the fundamental value of the asset I am thinking of buying or selling, compared with the market price, what information do I know that others do not or is more valuable about the prospects for that asset, is now a good time to buy or sell. Others may be selling, for example emerging market debt and equities, but is this based on a knee jerk reaction to a series of tweets, or a more fundamental assessment of the longer term value of the bonds and companies?
As Sir John also said: “If you want to have a better performance than the crowd, you must do things differently from the crowd.”
This article was published in Investment Week on 4 July 2018.
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