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Fragile tape

Were we to pay strict heed to Thumper’s sagely advice ‘if you can’t say something nice, don’t say nothing at all’, Innovation would be thin gruel. Last week we tried to be very positive about unintended consequences of a decade of rising share prices. Today, let’s have some fun and have a gander though some of the potential dark side.

First, there is a perception, maybe born of ten years of data, that investment is both easy and lucrative. All one has to do, it could be argued, is to buy a portfolio of funds, let the markets raise the value every year and we can all charge a percentage fee each quarter (or year, or month) for being so jolly clever.

Statistics prove that this is the correct thing to do. When we ask clients over what time period they wish to invest, do we not all usually describe ‘long-term’ as being more than, say, seven years? So we have long-term data showing that this strategy works for clients and works for investment and wealth managers.

The fragility is there for all to see. We are in an era of ‘Greats’. The Great Financial Crisis begat the Great Bull Market. What will the GBM beget? The Great Stagnation? Or maybe ten fecund years will morph into a decade of famine?

Maybe, just maybe, the past decade is a guide to what is coming next and the GBM turns into the Even Greater Bull Market. Investment-wise, it is the outsider. Yet it is the premise on which too many business models have been built.

The generation of ‘income’ has become easy. Except that it has actually become exceptionally difficult. In a rising market, total return falls from the trees. Why worry about the actual income, when you can top up with capital gains? Not only that, but one is allowed £11,700 of this tax free. What could be simpler?

Last week we touched on the power of positive compounding. The mathematics though have a profoundly dark side. Let’s have a look at a quick example, a client with a portfolio of £234,000 wanting a 5% return. Easy squeezy lemon peasy, we all say; that is exactly the CGT allowance of £11,700. Markets go up about 5% a year, we will take out the profits and the actual income can cover fees. Job done. In perpetuity.

Now, let’s look at this in a scenario in which markets fall by 5% a year. In year one, that ends up as a 10% reduction to the portfolio. By the end of year two, the strategy has reduced the portfolio to £188,370. With a mere two years of slightly disappointing returns of -5%, this strategy already requires a 24% rise in the portfolio value just to get back to where we started from. Could portfolios fall 5% in 2019 and 2020? The question doesn’t need answering.

One lesson that appears to have been learned from past mishaps is the peril of the optimizer. Asset allocation tools that look at ten years of data of return and risk should now be maxing out on equity weights. Returns have been stellar and volatility flatter than a pint of Doom. I would have expected by now that it would be common to see inappropriate amounts of equity piled into more cautious portfolios. It is good that it is not happening. It may only be time until it does, but the simple trick of having a specified cap on equity weights looks to be doing the business.

We say regularly that until we crack the space-time continuum, none of us can see into nor predict the future. Yet we have to have views on this, we cannot just ignore it. It is desperately important to understand the views that we are all already taking and the extent to which these have been shaped by ten years of rising equities.

So this week we have no mention of Mrs May, the B word, Mr Trump or sustainability. We make passing mention of SSE’s aestas horribilis and the importance of remembering that not every summer henceforth will look like 2018’s. Markets though have a bad dose of what psychologists call ‘recency bias’; they are, in the words of Level 42, only human after all. By the time the weather has gone all cold and windy everyone will have the heating turned up, powered by SSE’s wind turbines.

Finally, we make immodest mention that Innovation has been named on the shortlist for Investment Week’s ‘Best Investment Research Blog’. I am not sure I know what a blog is, but is it awfully flattering nonetheless.

Well done to the select few (and a name check for Ali) who knew about Kylie and Jason. Today, how has the start of a popular cycle ride become more punctuated over the past week?

Jim Wood-Smith - CIO Private Clients & Head of Research

Jim Wood-Smith – CIO Private Clients & Head of Research


Hawksmoor Investment Management Limited is authorised & regulated by the Financial Conduct Authority ( This document is issued by Hawksmoor Investment Management Limited (“Hawksmoor”) whose registered office is at 2nd Floor Stratus House, Emperor Way, Exeter Business Park, Exeter, Devon EX1 3QS. This document does not constitute an offer or invitation to any person in respect of any investments described, nor should its content be interpreted as investment or tax advice for which, if you are an individual, you should consult your independent financial adviser and or accountant. The information and opinions it contains have been compiled or arrived at from sources believed to be reliable at the time and are given in good faith, but no representation is made as to their accuracy, completeness or correctness. Hawksmoor, its directors, officers, employees and their associates may have a holding in any investments described. The editorial content is the personal opinion of Jim Wood-Smith, Head of Research. Other opinions expressed in this document, whether in general or both on the performance of individual securities and in a wider economic context, represents the views of Hawksmoor at the time of preparation. They are subject to change. Past performance is not a guide to future performance. The value of an investment and any income from it can fall as well as rise as a result of market and currency fluctuations. You may not get back the amount you originally invested. With regard to any of the Hawksmoor’s managed Funds, please read the prospectus and Key Investor Information Document (“KIID”) before making an investment.

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