By Chris Metcalfe, Investment Director at IBOSS Asset Management
Genuine inflection points in markets occur relatively infrequently, but when they do, investing via the rear-view mirror could lead investors into making some extremely poor decisions and at precisely the wrong times. The recent release of a well-publicised report, exposing the poor performance of certain funds, has given us concerns that this scenario could potentially occur for investors during the current market climate.
Recent investment strategies
In recent times, technology and other similar momentum stocks have offered investors very generous returns. For this reason, it is easy to see why so many will choose the DIY investing route. However, many investors will also have forgotten, or be unaware, of the importance of fundamentals, or even the advice a professional financial adviser has to offer when it comes to generating long-term investment returns. But as we have already started to see, things really are starting to change across the investment landscape, and at IBOSS we have been saying for a while – we think the next 10 years, and what will work successfully for investors, is going to look very different from the last.
For much of the past decade, strategies such as ‘buying the dip’, ‘running your winners’ and ‘momentum investing’ have worked incredibly well. The tailwinds of super-easy monetary policy, tax giveaways and an unofficial, but hardly secret, US central bank commitment to not raising interest rates combined to power equity markets higher and bond yields lower.
Once the potential magnitude of the pandemic on economies became apparent, governments across the globe reacted with yet more liquidity and emergency fiscal measures. After a brief but brutal retracement in markets, the global authority’s response had the effect of reinforcing the investment case of growth over value, coupled with the new working from home stock champions. These stocks were often the same ones that had already benefitted from the low-interest-rate environment and retail clients, especially in the US, piled into these momentum plays on an unprecedented scale.
Cracks starting to appear
The first cracks in the strategies, such as ‘buying the dip’ etc. surfaced with the vaccine breakthrough in Q4 2020. The first losers were the retail darlings such as Zoom, whose share price peaked at 478, having been circa 100 pre-pandemic. Much of the flows were unadvised retail clients with little or no attention paid to the balance sheet, the business model, or the company’s future profitability.
While some of these smaller tech, growth-oriented stocks started to falter, many larger ones continued to perform well. After all, through most of 2021, inflation was allegedly transitory and interest rates were going nowhere fast. Value managers, and in particular income managers, continued to be under relentless relative pressure against their growth peers. It was difficult for multi-asset managers to allocate to value and income funds as the performance tables looked positively dreadful on a comparable basis. To sum up this period – investing using the rear-view mirror had been working just fine overall and for growth investing, with the limited exceptions of some working from home stocks, it was business as usual.