The world is beset with the most challenging events we have seen in a long time. As one would expect, markets have fallen and investor’s anxiety and indecision has increased. Almost no investment or asset class has been immune – low, medium or high risk. Not even the old bell weather – residential property, which is suffering as high mortgage interest rates reduce the affordability for lending. The smaller the mortgages available, the less the buyer can pay.
Our portfolios have been hit as well, and I would like to explain where we are at:
From the start of 2022 when Russia invaded Ukraine, global equity markets sold off partly to de-risk and prices continued to fall with a lack of buyers. This hurt growth stocks and benefited large caps over mid/small caps – as investors have sought relative safety.
Since then to the end of October this year, the FTSE 100 is 2.4% lower, the FTSE 250 Index is down -27.25%, the small cap Index is down -31.25% in the UK. FTSE Global Small Cap Index is down -14.28%.
The MSCI World Index is only down -4.38% and the NASDAQ 100 is down just -1.45%.* These more resilient returns have come from 10 US Megacaps – (Alphabet, Amazon, Apple, Broadcom, Eli Lily, Meta, Microsoft, NVIDIA, Salesforce and Tesla), although we do have reasonable exposure to these either directly through our US and global exposure, or indirectly through the many other companies that benefit from trading with them. We are wary of over-exposure, as their share prices already seem to include substantial future revenue increases, which may be more muted than anticipated.
The FTSE 100 Index appears to be the anomaly and currently sits at 7,342 down just -2.4% since 4th January 2022. It has been supported by its large exposure to oil and gas, and financial stocks, both benefitting from the sharp rise in energy prices and interest rates.
Over the last twelve months, the rapid rise in interest rates has hit the value of lower risk assets hard, without the normal corresponding rise in equities. The capital value of an interest-bearing investment, like Corporate Bonds or Gilts or a high dividend bearing alternative asset, like infrastructure – falls as interest rates rise. The argument being – why should I take investment risk when I can get a reasonable if lower interest rate at the bank without risk to my capital?
It is tempting to rush to cash when some banks are offering more than 5% interest if you are prepared to tie up your capital. However, although your capital value is protected from investment losses, these interest rates are below the rate of inflation. That means the buying power of your money is permanently eroded by the difference between the two each year. And the markets only need a small change in sentiment for the declines to halt and even reverse. These moments happen quickly, and are easily missed by those attempting to time the market by switching between assets.
As we saw last week (1st November onwards), the news flow and economic data suggested that interest rates may not need a further increase, at least for now. The markets reacted quickly to this, and if interest rates remain static and even start to come down, the market outlook should start to improve.
It is worth bearing in mind that 23 years ago at the turn of the Millenium, the FTSE100 closed at 6,930 – a capital return of just 6.4% since then. You may question the value of investing in this index, if the dividends paid by these companies were re-invested over that whole period, the total return would have been 147.72%.** Investing is not just about the current share price but the total return including dividends and interest.
At Murdoch Asset Management, we have always leaned towards mid and small cap companies because of their fundamentally stronger long-term growth potential. But they suffer steeper share price falls when the world is in spasm and investors seek safer havens, and this has meant we have short-term underperformance when compared to our peers. The long term is still above average with 10-year out-performance in all but the two highest risk portfolios when compared to the Investment Association benchmark.
In all cases, we continue to advocate investing in funds where the individual managers are looking at the longer-term prospects of the companies in whom they invest, rather than the short-term price of the stock. Nothing has fundamentally changed in this respect and when the global economy starts to recover, we expect to see a corresponding reversal of fortunes.
Our investment process makes changes to funds where a fund no longer meets our criteria. Either the manager has left and the proposed replacement doesn’t have an adequate track record, the performance is poor compared to its peers for a sustained period or the manager has changed their process.
On that basis, we have made changes to several of our funds of late, our US exposure has gradually increased and we are diversifying our infrastructure assets. Our monthly investment committee meetings bring together our analysts and key decision makers, and we will continue to invest on a ‘bottom up’ basis, avoiding attempts to time the markets and look for long-term, good companies to invest your money in.
From a personal perspective, you should already have adequate cash to cover your short-term needs and we have agreed your risk profile – specifically your tolerance for investment loss. Now is the time where this tolerance will be tested but accepting loss in the short term is as important as hoping for growth in the long term.
But if your personal needs have changed or you want to reassess your overall investment approach or just want reassurance, please do let us know and we will arrange a call / zoom or face to face meeting.
*Source: Financial Express Analytics, Price Return, Bid to Bid, GBP£, 1st January 2022 to 31st October 2023
**Source: Financial Express Analytics, Total Return, Bid to Bid, GBP£, 1st January 2000 to 31st October 2023