Portfolio Adviser: PA Interviews

17th July 2013

I was recently interviewed by Esther Armstrong, the News Editor at Portfolio Adviser. Esther records a monthly series of videos with investment managers which are published online. We discuss here Emerging Markets underperformance, the balance between low cost & top talent and finally the first six months post RDR. Here are the links to three short videos:

Part one: Husselbee tells the truth about GEM underperformance

http://www.portfolio-adviser.com/video/pa-videos/wealth-manager/pa-interviews-john-husselbee-part-1

Part two: "Price is what you pay, value is what you get."

 

http://www.portfolio-adviser.com/video/pa-videos/wealth-manager/pa-interviews-john-husselbee-part-2

Part three: Six months on from RDR

http://www.portfolio-adviser.com/video/pa-videos/wealth-manager/pa-interviews-john-husselbee-part-3

Growing Pains

28th June 2013

This blog was published in Portfolio Adviser on 2^nd July 2013. Follow the link:

http://www.portfolio-adviser.com/comment---analysis/growing-pains

Emerging markets have had a difficult start to 2013. In sterling terms (as at 25/06/13) the MSCI Emerging Markets Index was down -10% whereas the S&P 500 Index gained +18.7%. Over the period, fund investors holding active managers have been slightly better off than those investing in the index, the average fund in the IMA sector being down -9.2%.

 

Those managers who have typically been more defensive and steered their investment process towards absolute return have sheltered investors from most of the decline. Here I am thinking of First State and its large investment team headed by Angus Tulloch in Edinburgh.  The First State Global Emerging Markets and Global Emerging Markets Leaders Funds fell -3.0% and -3.7% respectively. Other notable performers for the year to date include two perhaps less well-known names, Hermes Global Emerging Markets Fund (-2.1%) and Somerset Emerging Markets Small Cap Fund (-2.1%).

Today many of the major emerging markets - Brazil, Russia, India and China - are suffering from growing pains, mainly stemming from the global financial crisis, a creation of western economies. The long term growth story for emerging markets, born out of the growth of the middle classes and government infrastructure spending to support private investment, is well-understood. Over the last decade the acceleration of the wealth transfer from West to East has resulted in these economies contributing more and more to global economic growth. However rapid growth needs to be handled with care, particularly when coupled with the challenges inherent within structural change and reform.

Following the 2008/9 crisis, economic growth in emerging market economies remained robust, leading to strong investment flows. This accelerated growth and inflation in the regions, particularly as some authorities were reluctant to see their currencies strengthen, a development which would undermine the competitive advantage that they had so effectively exploited for many years. However, inflation has risen, and with increasing domestic demand, wages have increased sharply too – in China particularly. These economies have lost some of their competitive edge, with growing imports deteriorating trade surpluses.

If western economies are facing some difficult choices, so too are emerging markets, where economic growth is slowing and inflation remains high. As a result, interest rates will have to rise to combat inflation in consumer prices which will be negative for bond and equity investing.

There is also a close relationship between commodity prices and emerging markets. Producers in Brazil and Russia rely on consumers in India and China. Slowing demand has resulted in weaker commodity prices which have added to further selling pressure. These views on the economy and commodity prices, I believe, have already been reflected in bond and equity markets.

Clearly, some investors have chosen to reduce weightings in favour of economies at a different stage of the economic cycle. Indeed, prices have now fallen to levels where valuations are considerably cheaper relative to those in western markets. These valuations, however, reflect the less favourable fundamentals of today and may present an entry point for long term investors wanting to build up their holdings.

Stand by me

27th June 2013

This article was published in Professional Adviser on 11th July 2013.

The inauguration of Franklin D. Roosevelt as the 32nd President of the United States of America was held on Saturday 4th March 1933. After taking the oath, he delivered a speech perhaps best remembered for the words, “The only thing we have to fear is fear itself.”

This astute observation was made at the time of the Great Depression, a period of slow economic growth, high unemployment and volatile equity markets. We find ourselves living in similar times, with sluggish growth, high unemployment and as we have just witnessed, the fourth large sell-off in equities since the lows of early 2009 – a fall, once again prompted by talk of the removal of central bank liquidity in the form of QE.

Uncertainty heightens the anxiety of clients who easily become fearful and risk averse. Indeed, there is a whole field of academic study dedicated to investor behaviour and irrational, emotion-driven decision-making. Many of these studies conclude that as financial assets fall and investors become more risk averse, they put at risk their long term financial goals. This is where ongoing education and strong client relationships are so important.

Having worked in partnership with many advisory firms for a very long time, I believe that in these uncertain markets the role of the Adviser has assumed even greater significance.  Advisers establish and build their long term relationships with clients on trust. They maintain that trust by meeting client’s long term goals whilst understanding and respecting their appetite for risk. Essentially their job is to manage client emotion and ensure they remain focused on achieving their objectives, especially during periods of market turbulence.

I firmly believe that education is the key to reducing client anxiety brought on by short term market fluctuations. A large part of this often subliminal instruction has to be delivered by the Adviser demonstrating an ability to translate theory into practical advice. I am keen to support our Advisers and typically once a quarter will present to their clients. At a recent presentation, clients although delighted with the returns I had delivered over the last year, nonetheless had concerns about the near future. I warned of a potential decline in prices, but could foresee no reason to abandon the asset class. To support my argument I showed how equities had historically helped clients to achieve their long term financial goals despite the interim ups and downs.

It has been nearly five years since the Global Financial Crisis when many investors decided to head for equity market exits. Whilst bond investments, supported by extraordinary monetary policy have been very rewarding since then, the chances of this being repeated are unlikely. As we all know, equities have recovered strongly, albeit not in a straight line - and it is Advisers who have played a critical role in managing clients’ risk, emotions and return expectations. Clients who have not wavered from their long term strategy have been rewarded, but we can be sure that the recent heightened market turbulence will test their nerve once more.