Market volatility and our portfolios

2022 has started with volatility hitting global stock markets. Having been refreshed over the Christmas break, the stock market has given us a reminder that markets do fall.

2021 was a year of generally good returns for investments as economies tried to open up as their populations were vaccinated. This opening up pushed up demand in various sectors of the economy at a time when we were (and still are) dealing with Covid-19 infections.

The continued infections and restrictions for having Covid built up bottle necks in supply chains at a time of rising demand which in turn pushed inflation higher.

At the end of 2021, the Federal Reserve (The Fed) indicated that it was serious about tackling inflation which has increased well beyond central bank targets. This increased rhetoric for tackling inflation and pulling back on financial stimulus is what has shocked markets so far in 2022.

Rising interest rates puts pressure on the valuations of businesses depending on how far out their cashflow is generated. For growth companies, such as tech, a rise in interest rates acts as a discount to future expected earnings and so pulls down the short-term share price.

Other ‘value’ companies such as miners and oil companies who are priced more on their near-term earnings have performed well in the short term.

 

Within our portfolios we have seen this play out in varying performance across the funds we recommend.

Our overseas growth biased funds with companies like Baillie Gifford and Fundsmith have unfortunately seen returns come off. Baillie Gifford in particular has struggled due to the immature and innovative types of businesses they buy into.

We have spoken to both Baillie Gifford and Fundsmith about the funds and businesses they buy. Baillie Gifford’s approach to buying the businesses that are tackling a problem in society or a changing trend means that they tend to buy immature and innovative companies. Baillie Gifford is focusing on the longer-term potential of the companies they buy into and for them they do not see the shift in interest rates as something to undermine the longer-term reasons for them buying the stocks. They have a strong long-term pedigree in being able to pick the right companies to benefit from higher returns over the long term and we don’t see a reason to doubt this. Their style may currently be out of favour but not broken.

Our UK funds have weathered 2022 relatively well compared to their global peers. In particular Royal London has performed well due to its focus on value investing which means it has companies such as Shell and Rio Tinto that have benefitted from increased commodity prices.

Our view is to not try and be too tactical in the short term and take knee jerk reactions without logical thinking behind it. We know that markets are volatile and the reasons for this will change over time. What we know with markets is that those that remain invested and do not panic are the ones that benefit in the longer term. We don’t see a reason to doubt this for the future and so remain focused on selecting the right funds with the right processes.

 

How often should I look at my investments? Courtesy of our friends at 7IM please find some interesting facts below which you may find reassuring as well as a link to the view of Warren Buffet, the American business magnate, investor, and philanthropist and CEO of Berkshire Hathaway:

Over the last 45 years, the world equity index has returned 3100% (which rises to 5850% when you consider reinvested dividends!). But, if you’d have looked every single day over that time, you might not have thought prices had risen at all – the table below shows the movements of the market, using different periods as lenses.

 

DailyWeeklyMonthlyQuarterlyYearly5 yearly
Positive periods54%57%61%68%76%89%
Negative periods46%43%39%32%24%11%

MSCI World Price Return Index since 01/01/1976 to 01/01/2022

 

It’s only once you expand perspective that the tendency for markets to rise becomes obvious:

  • If you watched the market daily, only a coin toss could determine whether the market was up or down
  • If you watched the market yearly it would show a positive return 3 out of 4 times
  • If you watched the market every 5 years you would only see a negative return once

 

Opinion: Warren Buffett’s advice for a volatile market: patience pays – MarketWatch