Sarasin & Partners: Tenets for Investment Success in 2024 – Richard Maitland

by | Feb 23, 2024

By Richard Maitland, senior partner at Sarasin & Partners

The most rapid and sustained interest rises for 40 years are still working their way through the economic system, and prolonged monetary stimulus and a pandemic appear to have ripped up the economic rule book. Add in mounting geopolitical tensions, fears over a global recession and wider military conflict, and the risks for investors appear daunting. 

The temptation to seek instant solutions can be strong, not least because each new generation of bright young things believes they will surely manage things better than their predecessors. The wisest get the balance right between trusting their education and driving innovation, with an acceptance that the future tends to rhyme with the past. Things might look different this time, but they generally aren’t!

The investment industry is continually innovating: trades now happen in the blink of an eye, news zips around the globe and algorithms are ever-subtler and more complex. However, the best results are achieved by those willing to combine the best of the old and the new.

This is because investment markets are an almost perfect mechanism for embarrassing the most confident and luring the unwary into the same mistakes as the previous generation.  The past is littered with Nobel Laureates, PHDs and high-earners who failed to heed sage advice and learnt the error of their ways through experiencing defeat first hand.

There are, however, a few keystones of successful long-term investment that each new generation of investors discovers – often after seeking heroic results through skill and market timing.

Don’t bail out at the bottom 

The greatest protection for long-term investors is to accept that markets will be volatile. Bubbles and busts will surprise most investors, in terms of their triggers, size and timing. Who, in 2022, foresaw the current market passion for artificial intelligence – and who can confidently predict its passing? 

While opportunity costs and paper losses might create an emotional roller-coaster, permanent damage is only done if losses are crystallised. Cash that may be required at short notice should not be invested in volatile or illiquid assets, and investment success should not be predicated on clever market timing.

Be optimistic

Policy makers and investors typically find a way to ‘muddle through’, and many of the things we worry about don’t materialise. If you can spare cash for long-term investment, real assets such as equities will be your friend, even if they make the journey a little uncomfortable from time to time!

Don’t switch horses in the middle of the race

This applies to asset classes, investment approaches and investment managers. Many investment approaches take 5-7 years to prove themselves and even the most successful will disappoint for significant (18-36 months) periods.

It is always uncomfortable if one’s approach falls foul of market fashions, and the desire to be in the top quartile can encourage reckless behaviour. The worst thing a manager can do is to change tack after a period of underperformance, only for their approach to come back into favour. Likewise, asset owners can come unstuck if they switch from an underperforming manager to a star performer just before the latter enters a period of decline. 

Don’t lose faith in your abilities

During rough patches it is sensible to review processes, procedures and the reasons behind performance with a critical and objective eye. To use a sporting analogy, class is permanent but form is temporary. It is the long-run career averages that matter, not a few poor seasons in an otherwise successful career.

Appropriate diversification

A truly long-term investor could put all their assets in a leveraged portfolio of equities and stand a good chance of outperforming most investors over a 30-year period. Most of us, however, will need to draw on our investments –perhaps unexpectedly – long before three decades are up. Moreover, trustees and objectives change, and even seasoned investors lack the nerves for full-bore equity volatility or private market illiquidity. Even if some individuals do, their tenure on an investment committee is unlikely to exceed 10 years and their successors might not thank them for their legacy! 

Diversification is common sense, and a slightly lower long-term total return is, we would suggest, a price worth paying for flexibility and a smoother passage. 

Steady evolution

New asset classes, techniques and methods of implementation arise from time to time, and each new idea may appear strange and possibly dangerous or unnecessary when first considered. Today’s clients may be looking askance at suggestions of global equity allocations, total return approaches, allocations private markets, the benefits of equally-weighted benchmarks as comparators, or the investment implications of climate change.

However, procrastination is rarely the precursor to success. In our experience, regular small steps result in a portfolio that evolves progressively from decade to decade. While not every step will be correct, a good investment manager can add significant value if allowed to nudge things along in an incremental manner.

Manage the things you can control: costs, service, your time

Performance is unpredictable and known only after the event. However, costs can be calculated and lower costs will add absolute value. Meanwhile, strong service, well-organised meetings and clear materials can make the journey more comfortable. Ensure you pay a fair price and take service-oriented references from clients ahead of any appointment.

Distinguish between luck and judgement:

The best investors and asset owners acknowledge the sheer number of factors that influence their decisions. In some cases, brains, hard work and deep analysis can conquer complexity. Dealing with unknown unknowns, market irrationality and herd mentality calls for intuitive judgement, the wisdom of experience and a measure of good luck. 

Many investment decisions are driven by human nature and are not easily quantifiable. It is rare to have all the facts to hand before making a decision and by the time you do, the opportunity to profit has often passed. Mistakes will be made; the trick is understanding what could have been done better and how to do better next time. Sometimes, the answer will be nothing.

In praise of tortoises

It is always right to strive for improvement. However, if 120 years of investment data and cautionary tales of hubris can teach us anything, it is that clever active tactics must always be underpinned by robust operating parameters.

We would caution against any policy where success is predicated on being unusually clever, fast or bold. Investment is a long race that is typically won by the tortoise, even if the latest and fastest hares attract significant backing!

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