Global Warming, Global Meltdown, The Lost Decade and other Myths
"Being contrarian is never popular, and it's uncomfortable for much of the time, but it works."
Last week I had the pleasure of working with Graham French, who runs M&G Global Basics Fund and is responsible for managing £7.5 billion of investors' money here and in the US. We presented to private client lawyers in London, and Graham's focus was on the secular commodity demand in developing countries including China, India, Brazil and Russia.
We discovered the two of us majored on Geography at University. He is a bit younger than me though. We discussed how cold it was for the time of year, not only in London but many other places overseas. There's been record low temperatures in Florida, as I learned to my cost, and Graham tells me it's been just as bad if not worse in China.
We swapped notes about what we learned about climatology and weather patterns in the 1960s and 1970s. In 1978 an article appeared in Newsweek in which experts blamed tornados, hurricanes and unseasonably warm or cold spells on global cooling. If you track down the article you'll find meteorologists proposed covered arctic ice sheets with soot to attract warmth! No kidding.
I think we also had a laugh about the Global Meltdown. No, this isn't about our disappearing glaciers, we're talking about the World economic situation. This expression is everywhere you look, and if you can't bear to look, and switch on the radio instead, you'll hear it there too.
When I ask clients what a meltdown means to them they suggest anything between 50% to 90% down. Meanwhile, in the real world, accurate figures show the US GDP only shrank by 2.3% at worst over the last year. That doesn't look like a meltdown to me. Putting it into perspective that is a fall of $345 billion. If that sounds a lot to you, and I suppose it might because it's bigger than Greece's total GDP, there's a further way of putting it into perspective.
If the US was a company and you were looking at income and expenditure, while the income may have fallen by that amount, fuel costs expenditure fell by more. For every downside there's a plus.
And now we come to the Lost Decade. You can't have missed this one because it seems all experts agree it's been a lost decade for equity investors. If you say something enough times then people believe it without checking. So how do experts measure this?
For starters there's the 10 year record of the FT 100 Index. Experts tell us, in total return terms, it's only returned 0.9% per annum. And that's worse than cash or gilts. It gets even worse if you are a US investor. The total return of the S&P 500 Index is a loss of 0.9% per annum. And, of course, neither takes inflation into account.
But many of us know Indices such as the FT 100 or the S&P 500 are seriously flawed. They are designed so that the biggest and most boring companies dominate performance. So if their share performance is dismal then the Index struggles.
But if you think about it, in any Index there are sectors or shares under-performing, or over-performing the average. And if you're a canny investor you wouldn't want to buy over-valued shares, would you? You'd be fishing in the pool of under-valued shares. That's what all the best fund managers do. They buy the under-valued stocks, hold them for 3 or 5 years until they are over-valued and sell them on to people daft enough to buy them at that point.
So those clients of ours who have been exposed to fund managers such as Neil Woodford at Invesco Perpetual Income will not be surprised to know they didn't have a Lost Decade. His fund returned 9% per annum on a total return basis. That doubles your money after 8 years. Even better, if you've been a long term fan of Angus Tulloch at First State, his Asia Pacific Fund has given a total return of 14% per annum, which is double your investment every 5 years.
So you can listen to the headlines or you can take the contrarian view. Being contrarian is never popular, and it's uncomfortable for much of the time, but it works. And that's why we increasingly ask clients to back contrarian fund managers who, like Graham French, do detailed homework and leg work, invest in good solid businesses currently under-valued for some reason or another, and tuck them away for a rainy, if not icy, day.
This letter is the personal view of Alan Steel. Please check the appropriateness to your individual position with your adviser before taking or refraining from any action.