Tag

Investments

Good things come…

By | Investments, News & Views | No Comments

… to those who wait

‘Patience is bitter, but its fruit is sweet’
Aristotle

Good things come to those who wait.  This was the strapline once used by Guinness to refer to the 119.5 seconds it takes to pour a ‘perfect’ pint of their iconic stout[1]. With investing, the time periods we are concerned about are measured in years, rather than seconds.  Looking at your investment portfolio too often only increases the chance that you will be disappointed.  This of course can be challenging at times, particularly during tumultuous markets.

We know that monitoring markets on a monthly basis looks rather stressful, as they yoyo through time whereby there are times during which the market is growing its purchasing power (i.e. beating inflation) and there are times when it is contracting.

The evident day-on-day and month-on-month yoyo is a consequence of new information being factored into prices on an ongoing basis.  Investors around the world digest this information, decide whether it will cause a change in a company’s cashflows (or the risks to them occurring), and hold or trade the company’s share accordingly.  These are the concerns of active investors casting judgements on an individual company’s prospects.

Over longer holding periods, the day-to-day worries of more actively managed portfolios are erased, as equity / share markets generate wealth over the longer term.  For instance, between January 1988 and June 2020, monthly rolling 20-year holding periods never resulted in a destruction of purchasing power.  A longer-term view to investing enables individuals to spend more time focusing on what matters most to them and to avoid the anxiety of watching one’s portfolio movements.

This is not to say that investing is a set-and-forget process, however.  Wells Gibson’s Investment Committee meets regularly on your behalf to kick the tyres of the portfolio, after reviewing any new evidence.  Over time there may be incremental changes to your investments (or there might not be) as a result, but the Investment Committee shares the outlook illustrated in the figure above – we have structured your portfolio for the long term, and it is built to weather all storms.

Delving deeper

If we look at longer term market data in the US back to 1927, the result is the same.  Furthermore, we can cherry-pick a 20-year period which is fresh in many investors’ minds: the bottom of the Financial Crisis. In this (extreme) 20-year period, to Feb-09, equity markets had barely recovered from the crash of technology shares in the early 00s, before falling over 50% in 2008/9, in real terms.  These were unsettling times to say the least.

Despite the headwinds, investors had been rewarded substantially for participating in the growth of capital markets over the longer term.  An equity investor viewing their portfolio for the first time in 20 years would have seen their wealth more than double, whilst at the same time the media was reporting headlines such as ‘Worst Crisis Since ‘30s, with No End Yet in Sight’[2].

Have faith in wealth-creation through capitalism and try not to look at your portfolio too often. As the adage goes: ‘look at your cash daily if you need to, your bonds once per year, and stocks every ten’.

Header image by Sarah Mitchell-Baker on Unsplash; York, UK, Looking over the River Ouse in York from Lendal Bridge.
[1] https://www.guinness-storehouse.com/en/guinness-academy
[2] Wall Street Journal, September 18, 2008

Investment Behavioural Biases

By | Investments, News & Views | No Comments

Behavioural biases play a significant role in our decision-making as investors.

Whether we realise it at the time or not, these inherent biases can sometimes contribute more to our portfolio returns than the assets or funds we select.

A new briefing note from investment software provided Dynamic Planner has highlighted the value of understanding behavioural biases, along with other factors, to improve investment outcomes massively.

Dynamic Planner explains that there is extensive evidence about the impact of behavioural biases on investment decisions. But the factors that influence our susceptibility to these biases are less well covered.

By understanding how personality traits and behavioural biases influence our investment decision making and then taking some steps to counteract them, we can reduce the likelihood of making poor investment decisions.

Dynamic Planner identified five essential traits that define personality. In psychology, it is known as the Five-Factor Model – this includes openness to new experience, conscientiousness, extraversion, agreeableness and neuroticism. All of these factors have various facets to them.

The Five-Factor Model

Conscientiousness

This is the extent to which we are dependable, orderly, organised, responsible, practical, thorough or hardworking.

Neuroticism

This occurs when we’re feeling depressed, tense, nervous, angry, unstable, envious, worried or uneasy.

Extraversion

This is what drives us to be sociable, outgoing, energetic, talkative, bold, assertive and adventurous. Introversion often would make you low in this factor.

Openness to experience

This is what has the characteristics of being creative, imaginative, intelligent, analytical, reflective, curious and open-minded.

Agreeableness

This includes the characteristics of being courteous, polite, trusting, nice, kind, gentle, pleasant and sympathetic.

By considering each of the five personality traits, Dynamic Planner has explained how the characteristics fit with well-known investment behavioural biases, along with five ways in which investors can reduce or avoid these biases.

Dynamic Planner outlines below how these characteristics fit with the well-known investment behavioural biases along with five ways clients can reduce or avoid them:

Photo of people queuing by Halacious on Unsplash

Herd mentality

​(agreeable and/or introvert personality traits)

This relates to investors basing their decisions on the actions of others. Whether spurious (making similar decisions to others) or intentional (deliberately imitating behaviour) herding, both can be detrimental.

Investors can avoid herd mentality by not trying to time the market – this can be typical of investors engaging in herding behaviour. Such investors risk making losses and missing out on the highest periods of growth. It is, therefore, best to stay invested and follow the plan.

Anchoring bias

(conscientious, agreeable and/or introvert personality traits)

Investor decisions can be influenced by fixating on a reference point due to uncertainty of assets. They then go onto make comparisons and estimates based on this which is known as anchoring, even though the reference point is arbitrary and irrelevant.

Anchoring can result in the ‘disposition effect’ where subsequent investment decisions can be negatively affected by holding onto losing stocks or funds for too long or selling winning ones too early.

To avoid anchoring bias, ​investors must be objective, communicate with their financial planner and/or make research-based decisions to be less vulnerable to anchoring.

Overconfidence bias

(extravert, openness to experience and/or disagreeable personality traits)

Investors who are overconfident and overoptimistic may take greater risks.

Overconfidence can manifest in an overestimation of investment knowledge and result in an underestimated perceived level of risk. It can also be increased by ‘confirmation bias’ – where new information that supports an existing opinion increases confidence.

To avoid overconfidence bias, investors need to consider the consequences of their actions!

Overconfidence can lead to attempting to time the market due to a perceived level of skill and illusion of control. However, when things go wrong this can result in a greater loss.

Regret aversion

(conscientious and/or emotionally unstable personality traits)

Anticipating regret and envisioning the emotional discomfort of making a poor decision can result in inertia, where investors fail to act or stick with a default option for fear of making an active choice which later turns out to be sub-optimal.

To avoid regret aversion, investors need to have a​ ​systematic approach – following a plan with a diversified portfolio focused on long term investment goals will help investors regulate emotions and avoid succumbing to feelings of fear and regret.

Investors sometimes fall victim to the following:

Recency bias

(emotionally unstable and/or closed to experience personality traits)

Investors evaluate the likelihood of future events on recent memories without putting them in the perspective of the longer-term past.

This often relates to information that is easily accessible and available which can lead to poor investment choices.

To avoid recency bias, investors should have a long-term view for long-term investments to avoid short-term thinking which can lead to recency bias.

Louis Williams, Dynamic Planner’s Head of Psychology & Behavioural Insights said:

“Behavioural biases can influence risk tolerance levels and impact investment choices. However, if advisers can make investors more aware of the powerful biases that can influence their attitudes and behaviour towards financial risk, they can also help them to manage their investment journey in a much more positive way.

“Helping clients to have a much deeper understanding of their own personality and attitude to risk can be a great help in overcoming rash or ill-thought-out decision making when it comes to investments, especially when faced with unpredictable markets or a backdrop of uncertainty such as what we have experienced in recent months with the impact of coronavirus and Brexit transition. While unlikely to happen, if all investors were able to harness the ability to manage the well-known investment behavioural biases, there would be a directly positive impact on the volatility and fragility of markets.”

Header image by Andrew Buchanan on Unsplash
Photo of people queuing by Halacious on Unsplash

The Big Five

By | Investments, News & Views | No Comments

Investors love good stories and in recent years, many of these stories have centered around innovations that have fundamentally changed the way we live our lives.  Some examples might include the release of the original Apple iPhone in 2007, the delivery of Tesla’s first electric cars in 2012 and the launch of Amazon Prime’s same-day delivery service in 2015.

No doubt, many of you will have had conversations with friends and family around the successes, failures, and prospects of some of the world’s largest companies and the goods and services they offer.  In this article, we take a deeper look at the ‘Big Five’ tech companies – Amazon, Apple, Alphabet (Google), Facebook and Microsoft – through the lens of the long-term investor.

The ‘Big Five’, images from Unsplash [1]

In what has been a turbulent year thus far, some larger firms have come through the first, and hopefully last, wave of the ongoing pandemic relatively unscathed.  Those investors putting their nest eggs entirely in any combination of the ‘Big Five’ would appear to have done astonishingly well relative to something sensible like the MSCI All-Country World Index, which constitutes 3,000 of the world’s largest companies.  At time of writing, Amazon’s share price has faired best, increasing 75% since the beginning of the year.

These types of firms tend to struggle to stay out of the headlines for one reason or another.  Perhaps as a result, many of the investment funds found in ‘top buy’ lists have overweight positions in one or more of these companies.  Many of today’s most popular funds are making big bets on one or more of these companies, anticipating that the past will repeat itself moving forwards.

Sticking to the long-term view

The challenge for these managers, and others making similarly large bets, is that these are portfolios that will be needed to meet the needs of individuals over lifelong investment horizons, which for the vast majority of people means decades, not years. With the benefit of hindsight, managers who have placed their faith in these companies have stellar track records since Facebook’s listing on the market in 2012.

However, an interesting exercise would be to investigate the outcomes of these companies over a longer period of time, for example 30-years seems more prudent. This is somewhat difficult given that 30-years ago, 3 of these companies did not exist, Mark Zuckerberg of Facebook was 6-years old, Apple came in at 96th on Fortune’s 500 list of America’s largest companies and Microsoft had just launched Microsoft Office.

A partial solution to this problem is to perform the exercise from the perspective of an investor in 1996, which is the start of Financial Times’ public market capitalisation record.

The ‘Class of 96 Big Five’ consisted of General Electric, Royal Dutch Shell, Coca-Cola, Nippon Telegraph and Telephone and Exxon Mobil.  A hypothetical investor with their assets invested in either Coca-Cola or Exxon would have just about beaten the market over this period, those in Royal Dutch Shell, Nippon Telegraph and Telephone and General Electric were not so lucky.

This exercise is illustrative only, however a closer look is enough to see that almost no investor would want to stomach the roller coaster ride they would have been on in any one of these single-company portfolios.

Summary

The beauty of the globally diversified, systematic approach adopted by Wells Gibson, is that judgemental calls such as these are left to the aggregate view of all investors in the marketplace.

No firm is immune to the risks and rewards of capitalism; be it competition from Costco or Walmart taking some of Amazon’s market share, publishing laws causing Facebook to apply heavy restrictions on its users or some breakthrough smartphone entering the marketplace that is years ahead of Apple – remember Nokia?

Rather than supposing that companies who have done well recently will continue to do well, systematic investors can rest easy knowing that they will participate in the upside of the next ‘Big Five’, the ‘Big Five’ after that and each subsequent ‘Big Five’.

Those who can block out the noise of good stories and jumping on bandwagons are usually rewarded over time.

“But the problem that people don’t understand is that active managers, almost by definition, have to be poorly diversified. Otherwise, they’re not really active. They have to make bets. What that means is there’s a huge dispersion of outcomes that are totally consistent with just chance. There’s no skill involved in it. It’s just good luck or bad luck.”

Eugene Fama – Nobel laureate

Responsible, Sustainable and Impact Investing

By | Investments, News & Views | No Comments

Wells Gibson remains a strong advocate of systematic, evidence-based investing as this continues to stand the test of time and remains a robust, well thought through proposition which investors can understand and stick with, even in challenging market conditions.

For some time now, we have been eager to complement our standard investment proposition with the development of an ESG investment proposition and an Impact investment proposition. These are described as follows:

ESG investing has an increased focus on environmental risks (E); social sustainability (S); and good governance (G); and

Impact investing helps drive solutions to global problems and provides a material effect on important positive outcomes with regards to social sustainability and environmental risks.

The focus of this article is the development of our ESG investment proposition, and a further article will follow with regards to the development of our Impact investment proposition.

The Spectrum of Capital is a helpful diagram which summarises the financial goals and impact goals of different investment approaches, and you will notice this places a broad-based, traditional investment approach at the left-hand side, and, philanthropy at the other side. Wells Gibson’s standard investment proposition would fall into the traditional column i.e. the left-hand side.

Thanks to, UK National Advisory Board On Impact Investing, 2017 & Impact Management Project, 2017

Our ESG Proposition

Wells Gibson has now created an investment proposition which has an increased focus on ESG factors and includes funds whereby the investment approach is deemed to fall into the Responsible & Sustainable columns within The Spectrum of Capital.

We have sought to address the issues that are most important to environmentally focused investors, without compromising on sound investment principles, or requiring investors to accept lower expected returns.

Although this proposition has an increased focus on ESG factors, we will not compromise on the structural integrity of our portfolios because this can expose an investor’s capital to unwanted and unnecessary risks.  In other words, we are determined to apply our systematic, evidence-based philosophy to our ESG proposition.

We recognise there is no ideal single approach to ESG investing.  A number of offerings are continuing to develop such as negative screening; positive screening; a focus on the environment only; and a combination of E, S and G etc.

Our ESG Portfolios

In order to create portfolios with an increased focus on ESG factors, we consulted with Albion Strategic Consulting which provides Wells Gibson with ongoing governance oversight and is a member of our investment committee.

Using Wells Gibson’s standard, traditional portfolios as a sound template, our approach initially is to replace the existing funds used to obtain global, developed market equity exposure, with two new funds which stand out as being worthy of inclusion and are from investment firms we are very familiar with and trust, Dimensional and Vanguard.

We believe the rules based ESG approach of these funds is a step in the right direction, without materially sacrificing capital market returns:

The Dimensional fund [1] claims to reduce greenhouse gas emissions intensity by over 60%, and nearly 99% of emissions from reserves due to the systematic ESG weighting methodology; and

The Vanguard fund [2] excludes companies that do not align with the UN’s Global Compact principles.

As with our standard, traditional portfolios, the ESG portfolios will also invest in global short-dated bonds; global commercial property; and global emerging markets, however as new products emerge, these will be scrutinised before any decision is made to include them in our ESG portfolios.

We asked Albion to run an analysis comparing Wells Gibson’s standard, traditional portfolios to Wells Gibson’s ESG portfolios and this revealed:

A minor increase in cost;

A minor increase in share concentration; and

A minor reduction in the expected return (attributable to the reduction in allocation to small and value companies).

Our conclusion is that Wells Gibson’s initial ESG investment offering provides a meaningful and worthwhile progression towards a full ESG portfolio and will be used when requested by clients.

We continue to develop our Impact investment proposition and as soon as we have a viable solution, we will let you know.

Please don’t hesitate to contact Wells Gibson if you have any questions and if this is an area you would like to discuss please get in touch.

Long-term Investors: Please Don’t be Dismayed by a Recession

By | Investments, News & Views | No Comments

Although we are bombarded by news telling us we are about to enter a recession, don’t be dismayed – remember, investing is a long-term pursuit and is not about speculating to make short-term wins.

With activity in many industries sharply curtailed in an effort to reduce the chances of spreading the coronavirus, some economists say a recession is inevitable, if one hasn’t already begun.1

From a market perspective, we have already experienced a fall in equities, as prices have likely incorporated the growing chance of recession – in fact, it’s often said the market is ahead of a recession.

Investors might be tempted to abandon equities and go to cash because of perceptions of recessions and their impact.  However, across the two years that follow a recession’s onset, equities have a history of positive performance.

Data covering the past century’s 15 US recessions show that investors tended to be rewarded for sticking with equities.

The chart below shows that in 11 of the 15 instances, or 73% of the time, returns on equities were positive two years after a recession began.  The annualized market return for the two years following a recession’s start averaged 7.8%.

Recessions understandably trigger worries over how markets might perform however history can be a comfort for long-term investors who are wondering if, now is the right time to move out of equities.

Remember, “the stock market is a device to transfer money from the impatient to the patient.”

Please do get in contact if you have any questions.


Downturns & Upturns

Growth of wealth for the Fama/French Total US Market Research Index

 

Past performance, including hypothetical performance, is not a guarantee of future results.

CHART

In USD.  Performance includes reinvestment of dividends and capital gains. Indices are not available for direct investment; therefore, their performance does not reflect the expenses associated with the management of an actual portfolio.  Growth of wealth shows the growth of a hypothetical investment of $10,000 in the securities in the Fama/French US Total Market Research Index over the 24 months starting the month after the relevant Recession Start Date. Sample includes 15 recessions as identified by the National Bureau of Economic Research (NBER) from October 1926 to December 2007. NBER defines recessions as starting at the peak of a business cycle.

GLOSSARY

Fama/French Total US Market Research Index: The value-weighed US market index is constructed every month, using all issues listed on the NYSE, AMEX, or Nasdaq with available outstanding shares and valid prices for that month and the month before. Exclusions: American Depositary Receipts. Sources: CRSP for value-weighted US market return. Rebalancing: Monthly. Dividends: Reinvested in the paying company until the portfolio is rebalanced.

FOOTNOTES

1 Nelson D. Schwartz, “Coronavirus Recession Looms, Its Course ‘Unrecognizable,’” New York Times, March 21, 2020; Peter Coy, “The U.S. May Already Be in a Recession,” Bloomberg Businessweek, March 6, 2020.

Photo by Tommy Tang on Unsplash