• Written by 
  • 17/12/2015

At this time of the year many begin to think about New Year resolutions and making changes.

Tune out the noise 2 of 6 Compass Q1 2016

Residents of the United States, please read this important information before proceeding

Please read this important information before proceeding.

Even though we see the year-end as a great opportunity to take stock, and share our views for the coming year, we try to resist the urge to use the calendar as a reason to make alterations. Most of our investment themes worked during 2015 and we expect them to continue to deliver performance in the coming year. It will be our ongoing research that will form the basis for our views on when it is time to change our investment exposures.

In this first quarter 2016 edition of Compass, William Hobbs, Head of Investment Strategy, UK & Europe, outlines the thinking behind our current portfolios, including our view that inflation will pick up from its very low current level, pushing down bond prices but not materially affecting equities. A further view is that equities will be supported by corporate profits recovering in Europe and not yet peaking in the US. The final section of the article reflects on the impact of politics and elections on financial markets, which often is surprisingly limited, mainly due to most political events being in the category of what is often referred to as “known unknowns”, that the markets have had ample time to prepare for, rather than the “unknown unknowns”, the things you did not even have on your radar and therefore tend to be more disruptive.

Our current tactical asset allocation is outlined in a separate section. Looking at the major asset classes, we retain an overweight position in global equities relative to fixed income. Within equities we favour developed markets, mainly the US and Europe, while we are underweight emerging markets. Within our underweight allocation to fixed income we prefer developed government bonds over investment grade, high yield and emerging markets bonds. We also continue to be underweight commodities. In addition to these tactical asset allocation themes we have a broad range of other themes reflected in our manager and fund selections.

The performance of active managers ultimately depends on their skill and the range of opportunities that are available to them. These opportunity sets tend to vary over time. William Hobbs shows the importance of earnings dispersion in generating returns from stock selection, why it has been low and why we believe it is likely to remain at higher levels. Most of us agree that it makes sense to focus on getting the big things right, rather than wasting energy on the trivial. Yet, it is easy to become distracted and lose the big picture. Antonia Lim, Head of Quantitative Research, goes through what we think is the most important part of the investment process: asset allocation. This section shows why a diversified allocation should be more efficient over the long term, with more return miles to the risk gallon, and also make your portfolio better protected against the unknown unknowns.

Finally, while wishing each other a Happy New Year, perhaps we should think about what a happy new investment year looks like? We all want good returns, but there is more to it than that. Greg B Davies, Head of Behavioural Finance, presents recent research based on unique internal datasets going back over seven years. Some of the conclusions are that we tend to be influenced by our perception of returns, which is not always accurate. Our satisfaction with current returns is also influenced by what we think about the future. And we are strongly influenced by less relevant comparisons to how others are doing, rather than focusing on how our investments are doing relative to our own long-term return objectives.