Why we focus on getting the big calls right
The Nedgroup Investments Stable Fund, managed by Foord Asset Management, opened its doors to investors on 1 November 2007. And what a time to be kicking off a conservative multi-asset fund it turned out to be. The first ever Apple iPhone had just been released and “Lehman Brothers” was better known as an investment bank than a “moment” in financial market history. Just over a year later at the end of February 2009, the FTSE/JSE All Share Index was down 39%, the MSCI World equity index was down 31% (in Rands) and the average Regulation 28 balanced fund had lost 18%. The sub-prime mortgage crisis in the US had spawned a brand new financial market calamity acronym – the GFC.
A fund that has stood the test of time
Remarkably, the Stable Fund ended that tumultuous fifteen-month period in positive territory, up 3.4%, passing its baptism of fire with flying colours. The capital preservation tone had been set early on, and little did we know at the time, that the inherent resilience of the fund’s investment philosophy would have many more opportunities to prove itself to investors in the years ahead.
Conservative global balanced strategies have a tough time pleasing the audience. When markets are strong and investment returns plentiful and easy, stable funds are often compared to much riskier balanced funds, which are able to capture a lot more of the market upside given their higher equity allocations. But when markets are weak, investors look to money market and income funds as the alternative safe haven. To make matters worse investors are often lured into switching at exactly the wrong time as a result.
Against this background, what pleases us most about the Stable Fund’s track record, is not the fact that it has delivered strong real returns for investors after all costs and fees. Nor is it the fact that it is ranked number one in its respective peer group. Whilst these are both highly commendable outcomes, what pleases us most is the fact that the fund has never in its history delivered a negative return over any rolling twelve-month period:
The closest the fund has come to a negative twelve-month return was in February 2009 when it delivered 0.9% against the market falls through the global financial crisis outlined above. The next lowest one-year return was 1.1% for the year ending November 2018 when the ALSI returned -12.6% and the MSCI World was flat in rand terms. Similarly, between April 2019 and March 2020, the ALSI lost 18% of its value while global equities were more than 10% down in dollar terms following the COVID-19 pandemic related sell-off. Amazingly, the Stable fund ended this period +3.9%, once again proving its mettle in tough markets that arose from largely unforeseeable global events.
Focus on managing downside risk
This last point really is the key. In investing, while we are able to (and do) build many possible future scenarios and apply probabilities to them, it is simply impossible to know the future with any degree of certainty. Which means that balance and careful management of the downside risks are highly important. We don’t have to know exactly what is going to happen next and if forced to take a big bet one way or the other, we would be at risk of getting things completely wrong!
Rather, as Sir John Maynard Keynes said, “it is better to be mostly right, than precisely wrong”. The concept of precision is psychologically very comforting — our human minds are hardwired to find precision, even where none exists. There are of course certain endeavours in life where precision is not only essential but also completely possible, and increasingly so as mankind continues to develop the technologies with which to do them. They are typically found in the science and engineering realms. Precision was non-negotiable for NASA scientists trying to put a man on the moon in the 1960s, or Elon Musk’s Space-X geeks who created a rocket ship that can land itself on a square meter patch back on earth after delivering its payload to orbit.
Fund Managers can’t predict the future
For systems as intricate and exceedingly complex as the global economy and its associated financial markets, the idea of precision becomes a fallacy. In the world of investing, we are dealing with the future. Unlike the hard sciences, it is a future that is not confined to a predetermined set of elements whose behaviour under certain conditions we can know with certainty. We simply cannot with full accuracy and without risk predict market tops or troughs, or those of individual securities either. Furthermore, we quite simply don’t need to. It is precisely for this reason that Foord’s investment philosophy is focused not on point forecasts, but on getting the big calls right. We also diversify our investment positions such that we can deliver a reasonable investment outcome even if our base case scenario does not eventuate. Mathematically, therefore, we don’t have to always be right — just more right than wrong, and as consistently as possible. Then, if we are patient, the mathematical wonder of compounding will work its magic.
Stable in turbulent markets
So it is that through all of the extreme market movements summarised above, and notwithstanding some of the remarkably resilient fund returns delivered in those times; it is notable that the allocation to equities in the fund has never been below 22% and has touched the maximum 40% on only a few occasions. There have been no large market timing calls or knee-jerk panicked reactions to market events. Just a steady hand and a keen understanding of investment risk and how best to manage it.
The range of possible economic, political, environmental or investment outcomes is ordinarily wider than our human minds can generally predict. The current elevated levels of risk and uncertainty makes this range of possibilities even wider. We must therefore resist the temptation for superficial precision even more than usual because the consequences of being precisely wrong are that much worse. This is the thinking that informs our cautious fund positioning, which is neither fully invested in risk assets hoping for a rebound or fully in cash awaiting a market bottom. Rather, we have a balanced exposure to the different asset classes. We focus on specific investments where the range of possible outcomes is as narrow as possible, rather than trying to load the bases on the elusive all-out winner — this is not the time for taking that kind of risk (and for the Stable Fund, it never is).
As we pass the Fund’s 15th birthday milestone, we do so with a large amount of humility and gratitude to the Fund’s investors. As English novelist George Meredith said, “don’t just count your years, make your years count”.