2016 – Reflections on a challenging investment environment

Towards the end of last year PSG Asset Management sent out an article entitled “2015: Reflections on a challenging investment environment”. At the time, they listed a few key observations about investing during times of uncertainty. These were:

• Uncertainty brings opportunity.
• Diversification is the only free lunch.
• Successful investing takes patience.

If you had read the original article, you would have noticed that, except for the year, this article has exactly the same title as before. PSG have been meeting with investors since the beginning of the year and they have been struck by the following:

• Investors are scared – they are seeing a lot of bad news.
• Investors feel helpless – they feel subject to events which are beyond their control.
• In times of fear, the flight instinct naturally kicks in and people feel the need to do something. It makes us feel better… temporarily.

Market sentiment is very effective at setting us up for failure

At the peak of pessimistic sentiment around the beginning of the year, some of the companies which had led the market correction down began to significantly re-rate and their prices have improved considerably. Making an investment decision when emotions have been shaken is seldom a good idea.

Being out of the market can be very costly

The past few months have shown how swiftly market rotations can take place – and how easy it is to get caught on the wrong side. Many of the advisers with whom they have recently met have lamented the situation that those clients who insisted on switching to cash during the latter parts of 2015 and the start of 2016 now find themselves in. These clients, having impatiently followed the prices (valuations) of their investments down, have now locked in these decreases as capital losses. To compound this error, they also missed out on a very significant correction in the early part of 2016. This would have been an opportunity to recover from the lower levels their investments were at.

Good advice and diversification are key

This is where a good adviser and a solid advice process come into its own. Those clients who have a well-diversified investment strategy with the appropriate level of risk given their time horizon (which is often longer than we think), will have been in the fortunate position where the different parts of their portfolio all played their role – from cash to offshore assets.

Investors survive turbulent markets by following a solid advice process, adopting a long-term, patient approach, and aligning themselves with a fund manager who is able to stay calm and hold the line.

Successful asset managers focus on the long-term and don’t panic

Our investment team is very aware of avoiding mistakes like focusing on short-term performance and making panic-driven decisions, which can have devastating effects on long-term returns. Our team is able to take a step back, do our research, debate vigorously and find those opportunities that arise out of uncertain times. We are prepared to take the uncomfortable decisions (including sometimes doing nothing!) that form the hallmark of a successful long-term investment track record. This has proven to deliver above-average returns over time, at below average risk.

We believe that the recipe for success is the alignment of investors, advisers and fund managers like us who have a common objective: solid long-term returns. An important part of this is knowing that to achieve this goal it is necessary to avoid short-term mistakes by making panic-driven decisions.

The above article has been extracted from the PSG Angle. The PSG Angle is an electronic newsletter of PSG Asset Management.