Over the past couple of weeks, two interesting items have struck us. The first was from Barclays Capital Equity Gilt Study 2006. This is an annual investment document that just about everybody in the industry reads. It contains important data and key insights. Reference is made to fund management processes, making the point that current relative asset valuations and fashionable investment practices continue to be dominated by the poor asset allocation decisions made during the 1990s.
This was the view of Tim Bond, one of the Equity Gilt Study authors. He points out that two of the cardinal rules of investment practice were broken; he said the cult of the equity remained dominant and an apparent belief in the abrogation of the law of gravity.
About the behaviour of investment management in the 1990's period, he said ' strategic asset allocation having fallen out of the financial fashion along with the apparently outmoded concepts such as market timing and value investing. Essentially the ship had neither captain nor pilot, merely a few cynical stokers in the boiler room and a crowd of nave passengers along for the ride. In short, nobody was looking where the ship was going, in the sense that forward-looking value considerations were entirely abandoned".
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If his remarks were only a reflection of history, there would be less concern. However, we take you back to his opening remark that "fashionable investment practices continue to be dominated by the poor asset allocation decisions made during the 1990s". He is clearly suggesting that in vast parts of the investment world, nothing much has changed.
The other interesting item came from a survey of money managers who oversee pension funds, endowments and high-net-worth accounts. The managers who faired best were those with rules that did not allow leeway for holding onto stocks for emotional reasons. The managers who relied on "flexible" sell strategies did far worse because this usually meant no action was taken to sell loss-makers. This survey was published in the Journal of Portfolio Management.
As we so often claim, investment management success demands constant attention, in the long run it also depends upon the willingness to change. No investment strategy works for all of the time. Investment markets move from being too cheap to too dear. At this point you must change. A good example of this was reported only this week about commercial property. The Duke of Westminster, Britain's biggest private landlord, warned that the commercial property market has moved towards unsustainable territory. Quite separately, the FT reported that commercial property auctions are standing room only with twice as many eager buyers now as existed in 1991 when prices were at rock bottom.
In 1991, the commercial property market in the United Kingdom was, unquestionably, too cheap. Today, is it now too dear? The Duke of Westminster thinks it is and we agree. Even if the top of the market is still ahead, it is not a good long-term investment opportunity, the yields are too low and hells teeth, there are much better long-term investment opportunities! Just because returns have been good for a few years, doesn't mean they will continue to be so.
A big difference between property and other investments is that property investments are invariably geared, in other words a great percentage of the purchase price is borrowed money. Other types of investments are invariably not geared.
To make a proper comparison, you have to gear both or neither investments. Gearing adds additional investment profit opportunity but brings with it considerable additional risk. You can only have a negative equity in geared investment.
By John Robson and Andrew Selsby at RH Asset Managment Limited, as published inthe Onassis Newsletter, a fortnightly
newsletter tht gives insight into the invesment markets
For more from RHAM, visit https://www.rhasset.co.uk/
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