As the need for capital preservation and cautious portfolio positioning becomes more apparent, Head of Business Development at Foord Asset Management, Nick Curtin, unpacks the strategic stance Foord’s portfolio managers have adopted given the prevailing high-risk low-return environment.
There are mounting risks and distortions in global financial markets resulting from a decade of post-crisis experimental monetary policy. Interest rates are still at record lows, central bank balance sheets remain massively swollen and the global debt problem has not diminished. How and when do these abnormalities unwind? And what impact will this have on financial markets? To quote Donald Rumsfeld, these are the “known unknowns”.
At the same time, markets continue to reach new highs, and volatility levels reach new lows. These are not healthy investment conditions. Include the numerous and escalating geopolitical risks and it becomes clear that the current risk environment is elevated and ripe. The South African economy remains constrained. Its political environment will get worse before it gets better and near-recessionary conditions are likely to extend for longer than most expect.
Defensive and cautious portfolio positioning
As real and worrying as these big-picture issues are, there is little that investors can do to control them. But professional investors can navigate the risks, as they have done over the decades. A defensive and cautious portfolio positioning is a good starting point, but what does this strategy entail?
Importantly, it should not mean that investors should give up on returns in a high-risk low-return environment or batten down the hatches to await a market crash. It does mean, though, that we must be even more attuned to the consequences of bad investment decisions than we normally would be given the low margin for error. Because our investment philosophy leads us to avoid binary outcomes, the current paradigm requires a higher-than-average threshold for deploying capital into an investment idea.
Foord’s portfolio managers are long-term investors. To employ a cricketing analogy, we are playing a five-day game. We are not competing in the T20 format. Conditions out in the middle have been tricky: the pitch is unpredictable and the ball is swinging. This is not the environment to be slashing at every wide ball, hoping for the best. The risks are too many. And remember that risk is what can happen, not what will happen.
Patience is key
The strategy is to be patient, wait for the loose deliveries and only play a shot when there is high conviction and low risk. We are therefore playing conservatively with a very straight bat behind the line. The loose deliveries will come and so will the boundaries, but the priority at this stage of the innings has been to stay at the crease and see off the new ball. To finish first, first you must finish.
Conditions for scoring will improve – indeed they already have. As we have repeatedly said over the last two years, returns are expected to be backend-loaded on a five- to seven-year view. And we remain on track with this expectation.
Certainty of outcomes has always been a hallmark of Foord’s investment philosophy. In the prevailing environment, we place a high premium on maximising the certainty of the outcome as opposed to swinging for the fences and risking a binary result. The best long-term returns come from keeping the scoreboard ticking over, from grinding out returns and compounding them over long periods without risking permanent loss of capital.
Throughout Foord’s 36-year history, there have been many unpredictable risk environments. Successful investment requires that we separate the sentiment and emotion of macro-economic and political issues from the mathematical objectivity and level-headed judgement required when analysing investments.
The good news is that we’ve nearly seen off the new ball and have taken most of the body-blows that we were expecting. Scoring conditions have started to improve as recent headwinds turn to tailwinds. We remain on track for a good score.
This article was based on a press release issued by Foord Asset Management.