Thoughts from the CEO

 

 

 

Flat is the new up, and why the ‘pursuit of mediocrity’is getting you absolutely nowhere.

 

 

 

A Happy New Year to one and all. You may be forgiven for thinking that 2015 has just been another one of those interminably drab years for investment - like 2013 and 2014?  

It may be for some, but in 2015, TAM portfolios were broadly up 5%   on Balanced accounts and nearly 7% on Adventurous Growth.  The   FTSE 100 indices are lower, the FTSE All Share is lower, the fixed   interest markets are lower, and corporate Bonds have had a sticky   year with doom and gloom pervading on liquidity warnings from governments and regulators.  This, added to the outright carnage in minerals, oils and emerging markets, does not fill one with warm and cosy feelings for investment return but at TAM, we managed to buck this trend and actually provide a respectable return.

In yet another year, good news on the steadiness and robustness of earnings and GDP in the US has not grabbed sufficient column inches, instead the headlines have been written heavily on the demise of oil, the collapse of economic growth in China, Grexit, Brexit, deflation, rising interest rates stifling growth blah, blah, blah.   In all of this, it has again been one of those years that the pacifists in investment (Index Trackers) have performed exactly where they set their stall out… mindless mediocrity.

If you had bought a bog standard FTSE tracker/ETF or equivalent 1 year ago, or 3 years ago (January 25th 2013, the FTSE 100 was 6,284), you would be exactly where you are today (give or take). So congratulations, you achieved what you set out to do – pursue mediocrity.

As a fund manager on the front line managing money for over 30 years, I am fed up with the indexers, the closet indexers and the “fund managers never perform” brigade thinking they are the only honest game in town.  The worm turned years ago (as they would themselves say) and the numbers don’t lie, but like all turning points, nobody notices that they, the index closeting, are poorly performing assets.  The rise and dominance of trackers, led by some huge statistical work proving that all active fund managers are perennial under-performers and are expensive to boot, is just great for TAM, as are those that seek to pursue beyond mediocrity.  In a sense, they are becoming self-fulfilling.  I love it… long live the pursuit of mediocrity.  One day, the market will get that they charge cheap fees for a cheap service and, dare one say over the past 3 years, a cheap return?

In the time since the closet and index managers have done virtually nothing, i.e. January 2013 to end December 2015, TAM portfolios have accrued additional value for clients – net of all TAM charges (before the harbingers of “I bet they didn’t count fees” come rolling in) – of 12-20%, dependent upon risk profile.  Yes, 12-20% vs. 0%! 

The indexers were well worth there 10bp or less charge for doing nothing… which is exactly what they did! I am not being negative about the use of ETF’s and index tracking tools in portfolio management at times in any cycle, indeed we use them ourselves.  For me, it’s what I consider as the blind pursuit of mediocrity at all costs that frustrates.  They are a loud and vociferous bunch, always willing to prove the relative incompetence of more decision making managers.

In short, index tracking should be left for those who wish to pursue cheap and cheerful… just be warned, this era of mediocrity in trackers may not quite yet be over!

Now, what did I mean by the comment, ‘Flat is the new up’?

My contention is that the flatness of the broader indices is belying some vast divergence in underlying performance of components of these indices – it has been and still is, a stock pickers market, and this we have seen evident with exposure in 2013, to the following showing these gains:

a) PFS Chelverton UK Income      +16.85%

b) CF Miton Multi-Cap Income    +18.91%

c) Fundsmith Equity                        +15.82%

d) SVM UK Growth                          +20.66%

Wow (remembering that it is against a 0% index return, broadly)!  These individual products within our portfolios and strategic weighting adjustments means that flat markets can, and have indeed for a number of years, added to investment return.  We think that we may witness some similar opportunities in 2016 and should not be afraid of flat, as we should remain confident that flat could be the new up!

The time has come again, however, to not live on past glories given the poor start to the year and higher volatility, but to instead consider the outlook very briefly for 2016 and the prospects for investment returns and TAM portfolios.  Christian Holland, Senior Investment Manager here at TAM, will expound that piece more fully later this week.

Regards,

Lester Petch

CEO, TAM Asset Management Ltd

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