Just a few stocks drive market returns

It is sometimes easy to forget that when markets rise and fall, we are looking at this through an aggregated, market-capitalisation weighted lens.  In reality, the fortunes of individual companies and even sectors may be quite disparate over both the short and longer terms.  Take a look at the figure below that illustrates just how widely dispersed US stock outcomes have been year-to-date 2023 (to the end of April).  The S&P 500[1] is up by around 9% in USD terms (4% in GBP terms as Sterling has strengthened against the US dollar).

In the first quarter of 2023, the top ten contributors to performance accounted for 90% of the market rise, with Apple, Microsoft and Nvidia contributing to half of the rise.  Yet in 2022 the top ten companies by size collectively fell 37% compared to the market fall of around 18%[2].

Figure 1: Individual US stock returns differ widely (YTD to 30/4/23)

Note: (1) This represents the return of the Vanguard S&P500 ETF in USD. Holdings data from Morningstar Direct © All rights reserved.

A combination of recency and hindsight biases can tempt the unwary into thinking that it is easy to pick stocks (e.g. ‘It was obvious that Meta would rebound after last year’s plummet in share price!’). Nothing could be further from the truth.

Active investors – who aim to beat the market through their stock-picking skills – see charts like the one above and lick their lips at the opportunities they offer.  Yet they are not guaranteed to beat the market, or even deliver the market return.

Passive investors on the other hand – who believe that markets work well incorporating all public information into prices – see the dangers of picking the wrong stocks and missing out on the returns that market, in aggregate, delivers. They can, more-or-less, capture the market return with a high degree of certainty.

A research paper in 2018 titled ‘Do stocks outperform treasury bills?’[3] had the remarkable effect of being claimed by both the active and passive sides of the investing debate as evidence as to why their approach is valid. He identified that the US$32 trillion of wealth created between 1926 and 2015 in the US market, was entirely generated by the top 1,000 companies, or put another way, less than 4% of the total number of companies that had existed on the US stock exchanges. A follow-up paper[4] focusing on non-US markets found that over 60% of all stocks failed to deliver a return higher than US T-bills and less than 1% of companies delivered all of the wealth creation from 1990 to 2018. The author states (in his original paper):

‘Not only does diversification reduce the variance of portfolio returns, but non-diversified portfolios are subject to the risk that they will fail to include the relatively few stocks that, ex-post, generate large cumulative returns. Indeed the results help to understand why active strategies, which tend to be poorly diversified, most often lead to underperformance.’

The challenge of structuring a highly active, concentrated portfolio to attempt to identify and capture the returns of these few wealth generating firms is immense, and at risk of both hubris and a lack of humility around the power of the collective market view (‘it’s all in the price’). The active management industry’s track record of delivering on its promise to beat the market is well-documented and extremely poor, with over 95% failing to do so over a twenty year period[5].

For those who accept that markets work, they can simply capture the market return through a low-cost, highly diversified systematic fund (of which index funds are a subset).

As the late, great John C. Bogle, the founder of Vanguard liked to say:

‘Don’t look for the needle, buy the haystack!’

Risk warnings

This article is distributed for educational purposes only and should not be considered investment advice or an offer of any security for sale. This article contains the opinions of the author but not necessarily the Firm and does not represent a recommendation of any particular security, strategy, or investment product.  Reference to specific products is made only to help make educational points. Information contained herein has been obtained from sources believed to be reliable but is not guaranteed.

Past performance is not indicative of future results and no representation is made that the stated results will be replicated.

[1]      This represents the return of the Vanguard S&P500 ETF in USD

[2]      Nasdaq, (2023) Top 10 Names in S&P 500 Responsible for 90% of Q1 Gains, April 05.

[3]      Bessembinder, H. (2018) Do stocks outperform Treasury bills? Journal of Financial Economics, vol. 129, no. 3, 440–457.

[4]      Bessembinder, H. (Hank), Chen, T.-F., Choi, G. and Wei, K.-C. (John). (2019), Do global stocks outperform US treasury bills? SSRN Electronic Journal.

[5]      SPIVA | S&P Dow Jones Indices. (2022)

Don’t just take our word for it!

We fundamentally believe that a systematic approach to investing provides the best chance of experiencing a successful investing journey. Sticking to some key guiding principles – which are grounded in evidence and logic – gives investors a solid foundation on which to build a sensible investment solution. This short note provides an insight into five of our favourite insights from experienced and accomplished academics and practitioners and explains how these words help us plant our investment philosophical flag in sensible space.

1.    A focus on risk management, rather than chasing performance

‘You don’t find out who’s been swimming naked until the tide goes out.’

Warren Buffet, Berkshire Hathaway 1994 Annual Meeting

The financial media enjoys reporting on top performing fund managers. Humans like exciting stories. Good investing, however, should – to most – seem relatively boring through taking a ‘risk-first’ approach. Ultimately, sensibly considered risks should be rewarded appropriately over time. The risk management process involves deciding which risks one wants to be exposed to in portfolios (such as broad global equity market risk) and which we do not (such as the use of leverage). Managing these risks tightly over time and monitoring them on a regular basis is key.

2.    Be diligent and act rationally, with due patience

‘Activity in investing is almost always in surplus.’

Charles D. Ellis, Winning the Losers Game, 1993

Ensuring any decision made is free from an emotional reaction is a must. Many are prone to making knee-jerk – and sometimes permanently damaging – investment decisions. Taking steps to avoid this is well-advised.

3.    Take part and believe in capital markets

‘You’ve got to talk yourself out of the market portfolio.’

Eugene Fama, Nobel laureate, speaking with The Rational Reminder Podcast, May 2020

Owning a share of companies through investing in capital markets is an effective way for investors to grow their wealth over time. Owning a little bit of everything is not a bad place to start. Luckily for investors these days, one can do so with relative ease through investing in mutual funds. Doing so enables investors to participate in the growth of listed companies from around the world in a diversified manner, avoiding being overly concentrated in a single stock.

4.    Keep costs low

‘In Investing, You Get What You Don’t Pay For.’

John C. Bogle, Founder of The Vanguard Group, February 2005

Cost is by no means the only factor separating better and worse investment solutions, but it is a significant one. Costs can be implicit (e.g. frictional trading costs) or explicit (e.g. fund manager fees). Clearly, any saving made by an investor is retained in the portfolio, rather than being passed off to another party in the process.

5.    Stick to the plan

‘Real-world application of fundamental investment principles produces superior outcomes.’

David F. Swensen, author and former CIO of Yale University endowment, 2005

An investor who can recall their key investment principles stands in good stead to avoid making mistakes. Abiding by some simple guidelines – such as those outlined by the investment mavens in this note – enables investors to employ a robust and repeatable process for managing their wealth.

FAKE NEWS!! Active outperforms passive!!

Unfortunately we now live in a world of fake news and ‘alternative facts’[1] where parties shamelessly push their own agenda at the cost of salient facts.  In order to be heard in the noise of social media, research headlines need to be bigger and more eye-catching.

For those investing using an evidence-based approach that means it is important to make sure that any evidence being reviewed is based on true facts, reliable data and sound research methodologies.  There is much good research and empirical evidence available, but some of a lesser quality occasionally makes the headlines.

A recent piece of research by a fund management firm that manages over US $580 billion[2] is a case in point, making the statement:

‘Active funds beat passives in every market in the UK over a 20-year period’

That is quite a claim to make.  The firm looked at funds in seven Lipper categories[3] and – somewhat surprisingly for an investment house filled with bright and talented people – compared how the fund with the best performance over the past 20-years had done relative to passive alternatives (index funds) and the index.  The methodology is so evidently flawed as to hardly be worth reviewing. It is best summarised as requiring a fund-picking strategy of perfect 20-20 hindsight!  They concluded that it would have been worth identifying the best active fund instead of using a passive fund. The problem is that this is almost impossible to do without a crystal ball.

Alan Miller of SCM Direct – a firm which has campaigned to improve investor outcomes – summed it up most effectively:

‘It’s a bit like saying you’re better off buying a lottery ticket than putting your money in the bank because had you won the lottery each year, you’d have done much better.’

Unfortunately this type of naïve research risks misleading retail investors, and even some advisers, against a sensible evidence-based approach suggesting that a passive approach makes good sense.

In their own data, the fund management firm in question revealed that in the six Lipper categories where there was a passive fund with a 20-year track record, in five the average passive fund beat the average active fund.  In the sixth, there was nothing much in it.  The best passive fund – which you do have a fair chance of identifying, unlike an active fund – outperformed in all six categories.  Another methodological flaw arises; no account seems to have been taken of the high proportion of UK-based funds that would have failed to survive the period.  A reputable study[4] reveals that only around 50% of GBP-denominated funds survived the 10-year period to the end of 2022.  Over 20-years this figure is likely to have been even worse.  We also know from this study that, on average across the eight categories of funds denominated in GBP (so a similar fund set to the flawed research above), 80% of active funds failed to deliver on their promise of beating their market benchmark over 10-years.  For a 20-year period this is likely to be higher, as evidenced in the US version of this study.

‘Enough, already!’ as our American friends might say.

[1]      This was a term used by White House adviser Kellyanne Conway to defend an untrue statement about the number of people attending President Donald Trump’s inauguration.

[2]      As reported in–do-its-claims-stack-up/

[3]      Lipper is a data provider who break down the fund universe into categories such as global equities and emerging market equities.

[4]      SPIVA Europe Year-End 2022 Report

Anchors Aweigh

By and large, behavioral science suggests that human beings make lousy investors. Whilst we are excellent problem solvers, we suffer from a whole host of well documented biases that, on average, erode the investment returns on offer from markets[1]. Being aware of our biases is a useful exercise if we are to limit the impact that they have on our decision making. In this short note, we look at both anchoring – the tendency to be influenced by a particular reference point or ‘anchor’ – and recency bias – the tendency to overemphasize the importance of more recent experiences relative to less recent ones.

Today’s capital markets are extremely well integrated, costs are low and anyone with internet access can use the power of Google (or even perhaps ChatGPT) to conduct their own research. However, historically investors have favored companies listed in their home country as opposed to those abroad. Partially this was down to the additional cost, complexity, and unfamiliarity of investing overseas, although these hurdles are relatively negligible nowadays. Even so, recent data suggest that the ‘home bias’ – the extent to which the home country is weighted in a portfolio over and above its market weight – persists.

Table 1: Investor home bias by region

Country Market weight Investor weight Home bias
UK 6% 36% 6x
Australia 2% 52% 26x
Canada 3% 21% 7x
Japan 34% 8% 4.3x
US 53% 62% 1.2x

Source: FTSE (2019) Appraising home bias exposure.…

Perhaps anchoring to the performance of one’s domestic market is to be expected given the above. For UK investors, the FTSE 100 measures the performance of the largest 100 firms listed in the UK and is frequently quoted in the papers and media outlets[2]. For some time, the UK has performed dismally when compared to international (ex-UK) developed markets. For example, the decade of the 2010’s saw the FTSE 100 companies return ≈75% to investors whilst international equity markets delivered a staggering ≈255% in GBP terms[3]! Since the start of 2021, the roles have reversed with the FTSE 100 delivering 31% versus 16% from international markets3.

Enter recency bias. The charts below investigate the shorter and longer period returns of the FTSE 100 and global developed equities further[4]. In the top chart, rolling annual returns show that the UK has generally lagged, although it has enjoyed a handful of 12-month periods of outperformance.

Figure 1: Rolling 12-month returns of the FTSE 100 and global equity markets

…but these periods are lost to history
Biases creep in here…

Data source: Morningstar Direct © All rights reserved. Funds: HSBC FTSE 100 Index Fund, Vanguard Global Stock Index Fund.

Zooming out to rolling 10-year periods paints a different picture. This is due to the many small periods of underperformance above compounding up to provide poorer outcomes over longer horizons, as demonstrated below.

Figure 2: Rolling 10-year returns of the FTSE 100 and global equity markets

Data source: Morningstar Direct © All rights reserved. Funds: HSBC FTSE 100 Index Fund, Vanguard Global Stock Index Fund.

The point is not to suggest that the UK is some sort of anomaly, or that this level of relative underperformance is to be expected moving forwards. There are plenty of examples throughout history demonstrating exactly the opposite. The point is that getting swayed by recent performance, and perhaps anchoring to one’s domestic market, is best avoided.

Removing our performance hats and replacing them with our risk ones, there are some very sensible reasons why having too many eggs in the 100 largest companies in the UK makes little sense from an investment portfolio perspective:

  • The FTSE 100 is highly concentrated with over 33% of the assets held in just the top 10 companies – the likes of Shell, HSBC and AstraZeneca being the top holdings at present.
  • The FTSE 100 is materially overweight to certain sectors such as energy (12% vs 5% globally) and underweight to the point of almost not having any in terms of technology (1% vs 21% globally).
    • This explains much of the recent performance differential above – where technology has struggled, energy stocks have flourished in the high-inflation environment exacerbated by the Russian invasion of Ukraine.
    • Over longer periods technology stocks have dominated (Apple, Microsoft, Tesla etc.).
  • The global opportunity set consists of over 10,000 companies across over 50 countries. Diversifying across them all as a starting point makes good sense and should lead to a smoother investment journey.

Be aware of that anchor and make sure that you do not get overly influenced by what has just performed well.  You have no chance guessing which market will do well next.  Just own the world.


[1] Nobel laureate, Daniel Kahneman, has a fantastic book called ‘Thinking, Fast and Slow’ that unpacks why we make the decision we make. It is a very accessible read for those looking for a new book!

[2] It rarely appears in headlines when things are going well, but you can be sure it will when we experience the next poor investing day/month/year. Another one – negativity bias!

[3] Funds: HSBC FTSE 100 Index Fund, Vanguard FTSE Developed World ex-UK Index Fund.

[4] Global developed equities (including UK) due to much longer track record.

Lessons from Silicon Valley Bank’s demise

The spectacular work ‘Another Place’ by the British sculptor Antony Gormley[1], of one hundred naked men scattered along 1.5 miles of Crosby Beach in Liverpool, provides a useful twice-daily reminder about hidden risks in the financial world.  As Warren Buffet once said about easy money and favourable markets hiding risks:

‘You only find out who is swimming naked when the tide goes out.’

The demise of Silicon Valley Bank (SVB) is one such case of being exposed by a falling tide.  The bank focused on providing banking services, including the placing of deposits, to many early stage and start-up tech firms, alongside venture capital firms, both in the US, and via SVB UK, to UK firms.  At the end of last week, depositors began to worry about whether the bank was going to be able to meet its obligations and began withdrawing their cash.  The root cause of their concern lay in the exposed reality of the risks the bank had taken by accepting deposits and then investing the money in longer-dated US Treasuries.

That worked just fine when short-term interest rates were near zero and longer-dated bonds paid higher yields.  Unfortunately, SVB’s skinny dip into the bond market was exposed by the rapid increase in bond yields in the second half of 2022, which saw yields on 10 Year Treasuries rise from 2% a year ago to almost 4% at the end of last week.  That put a huge dent in SVB’s balance sheet, due to the losses incurred on the bonds as a consequence of these yield rises (bond prices move in the opposite direction to bond yields).  This in turn lead to a rapid loss of confidence that the bank could meet its liabilities.

SVB UK was purchased by HSBC for £1 and its depositors’ money was secured, allowing its young tech firm clients to avoid a severe, even terminal, liquidity crunch.  In the US, the Federal Reserve, the US Treasury and the FDIC, which secures deposits up to US$250,000, came up with a plan to protect all depositors, including those uninsured by the FDIC.  The Fed also set up a borrowing facility for other banks to provide liquidity against US Treasuries (and some other assets) based on the bonds’ par (i.e. redemption) value at maturity.  Although other small banks are under pressure, this has likely stopped any systemic risk to the banking sector.  Equity and bond holders of SVB rightly face the risk of losing their capital.

We may see some volatility in bank stocks until the full picture becomes clearer (i.e. is everyone else wearing swimming trunks and will the Fed’s towel cover the embarrassment of any who are not?).

What lessons can we learn?

Perhaps the most important aspect of this debacle is to identify what lessons we can learn.  Here they are:

  1. A deposit is an unsecured loan to a financial institution. Your money moves onto their balance sheet and you only get your money back if the bank remains solvent.
  2. Government backed insurance schemes, have limits on how much they will protect you. For example, the UK’s FSCS guarantee on deposits is only up to £85,000 per eligible person banking group[2].
  3. Diversification is critical to managing risk. For those with cash, diversifying it between banks or via a money market fund should be an important consideration and advice should be sought where necessary.  CFO’s of these tech start-ups, and those of the venture capital firms, should have known better.
  4. The other aspect of diversification is at the security level. SVB has a global market capitalisation of around 0.03%, which is an insignificant amount in a diversified, systematic portfolio.
  5. Never assume that all financial institutions are smart. The age old mistake of borrowing short and lending long has brought down many institutions over the ages, not least Northern Rock in the UK during the Credit Crisis of 2007-9.  Many institutions regrettably pumped client money into Bernie Madoff’s multi-billion dollar Ponzi-scheme fraud through insufficient due diligence.  More recently, many high profile firms backed Sam Bankman-Fried’s now-collapsed FTX exchange in crypto-world (another area where a lack of swimming trunks is rapidly being revealed).

A systematic investment process can protect you from many risks, not least through broad diversification.  Whilst it is not Canute-like and the market’s tide will ebb and flow, at least you know that you are swimming with your trunks on!

Risk warnings

This article is distributed for educational purposes only and should not be considered investment advice or an offer of any security for sale. This article contains the opinions of the author but not necessarily the Firm and does not represent a recommendation of any particular security, strategy, or investment product.  Reference to specific products is made only to help make educational points. Information contained herein has been obtained from sources believed to be reliable but is not guaranteed.

Past performance is not indicative of future results and no representation is made that the stated results will be replicated.

[1]      It is a most spectacular installation, not to be missed if you happen to find yourself in Liverpool.

[2]      More information here:

Missing the best days in the market

Most investors – at some time – will be either tempted to time when to be in or out of equity markets – or wish they had when markets fall.  It would be great to be able to capture the upsides and avoid the downsides, but that is wishful thinking.

Investors may well underestimate the rapidity and magnitude of the movements that markets make, although the very material double digit daily moves around the Covid- crisis (March 2020) provided a useful lesson. In fact, a small number of days account for much of the market movement over time.  Picking which those days are – either to be in or out of the markets – is an extremely difficult prospect and the chances of long-term success are rare.  An analysis of missing the best days in the market (Albion, 2023) provides some food for thought, as the figure below illustrates.

Figure 1: Missing the best few days in the markets could be very costly

Source: Albion Strategic Consulting.
Data: Morningstar Direct © All rights reserved: SSgA SPDR ETF. Returns in USD. 23/01/1993 – 30/01/2023

Whilst these types of study imply a binary approach to being invested in equities or cash, which is a somewhat unreal scenario, it is evident that a few good days, weeks or months drive the bulk of market returns and missing them can be costly. Missing the best 30 days in this 30-year period deliver only 17% of the rewards that the market delivered[1].

Likewise missing the worst 30 days would be highly beneficial, yet the ability to pick them does not seem to show up in the data. The October 2022 Liz Truss/Kwasi Kwarteng ‘mini-budget’ in the UK provided evidence of just how quickly new information can impact markets, in that case the bond market.  Being right is quite a challenge. Being wrong can be very costly. The odds of success in market timing are slim.

A seminal piece of UK research (Cuthbertson et al., 2006) concluded that only around 1.5 % of UK equity funds demonstrate positive market timing ability.  The Nobel Laureate Professor William Sharpe agrees:

‘An [investor] who keeps assets in stocks at all times is like an optimistic market timer. His actions are consistent with a policy of predicting a good year every year. While such a manager may know that such predictions will be wrong roughly one year out of three, such an attitude is nonetheless likely to lead to results superior to those achieved by most active market timers.’

Stay invested!

[1]      As an aside, the data used is from the first US ETF launched thirty years ago, almost to the day.  It was revolutionary at the time for providing cheap and tradable (not necessarily a good thing!) access to the S&P500 index.

The error of reacting to market falls

Being an investor is never easy because, as humans, we tend to live in the moment responding to our emotions, the environment around us and the circumstances we find ourselves in.  From an evolutionary standpoint that has served us well as a species helping us to survive, but as investors we need to remain focused on the long-term goals that we have and not what is going on in the day-to-day, month-to-month or even year-to-year of the markets.  This is evident from the two charts below.

Each of these charts show that if we listen to this noise, we would spend most of our time being afraid of markets instead of embracing them for the returns that taking on sensible risks should deliver.  In equity market parlance, a ‘correction’ is deemed to be a fall of 10% or more and a ‘bear market’ is a fall of 20% or more. The columns are the annual returns of the market, and the diamonds represent the magnitude of fall from the market high in that year.

Figure 1: Global equity markets fall from a high every single year

Data: Live fund data used to represent asset classes, in GBP. See endnote for details.

It is pretty evident that any investor looking to profit from this would need some amazing form of 20-20 foresight to predict these short-term market movements, acting in advance of them happening and then getting back into the market again at the appropriate time.  Simply reacting, post-event, to market falls will invariably be a losing strategy. In reality, at any point in time, all of the information held by all investors trading in markets is reflected in current prices quite efficiently.  Prices will therefore move only on the release of new information, which is by definition a random event. As the Nobel Laureate Professor Robert Merton recently stated[1]:

‘If the market is disagreeing with me, or doesn’t seem to be aligned with me, that could be that I know things the market doesn’t, but it also could be that the market knows things [I] don’t!’

Investors were reminded in 2022 that bond returns can go down as well as up.  The same challenge in terms of reacting to falls in bond markets applies.  In almost every year, bond markets fall from an intra-year high.

Figure 2: Global bond markets also fall from a high every single year

Data: Live fund data used to represent asset classes, in GBP. See endnote for details.

Trying to time when to be in or out of bonds – and presumably into cash – could result in eroding away the term and credit premia that a sensible structure of short-dated global bonds hedged to Sterling has the opportunity to provide for those focused on their true investment horizons.

As the wise industry consultant and author Charles Ellis states:

‘In investing, activity is almost always in surplus!’

We agree.  Remain focused on your long-term goals, stay invested and rebalance regularly, for a simpler life and the likelihood of better outcomes.

Risk warnings

This article is distributed for educational purposes only and should not be considered investment advice or an offer of any security for sale. This article contains the opinions of the author but not necessarily the Firm and does not represent a recommendation of any particular security, strategy, or investment product.  Reference to specific products is made only to help make educational points. Information contained herein has been obtained from sources believed to be reliable but is not guaranteed.

Past performance is not indicative of future results and no representation is made that the stated results will be replicated.

Data series used: global equities – Vanguard Global Stock Index $ Acc in GBP; global bonds – Dimensional Global Short Dated Bd Acc in GBP

[1] Rational Reminder podcast January 5, 2023 – Episode 234. This episode is really worth listening to

2023 – Looking backwards and forwards

At the start of 2022 investors needed reminding that investing is not an easy game, despite having enjoyed around a decade of relatively strong – and fairly consistent – market returns, even in light of a global pandemic, recession, and political polarisation. 2022 has laid bare the fact that investing can very much be a game of ‘three steps forward, one step back’. If there was no risk of market downside, it would be unreasonable to expect any return at all above cash. This short note provides a brief look at the past 12 months, and highlights some of the lessons we can learn as investors.

Looking backwards

For many investors 2022 was a relatively tough year, with returns ranging from benign to poor across most major asset classes – global developed value companies being an exception. Rising prices make returns significantly worse on an after-inflation basis, with year-on-year inflation in the UK having reached levels not seen for decades. The year was particularly challenging for investors in bonds, as yields have risen (and thus prices have fallen) across much of the world. Bondholders with longer and lower quality debt suffered greater capital falls – shorter dated, high-quality bonds continue to be preferred.

Figure 1: Global investment returns – sensible assets 2022 returns

Data: Funds used to represent asset classes, in GBP. See endnote for details.

With few places to hide most investors will have finished the year in negative territory, which is to be expected from time to time. The magnitude of the losses, however, should lie well within the tolerances of their financial plan. Investors with a reasonable amount of equity exposure should be able to withstand more material falls than those experienced in 2022 (global equities fell by over 40% during the Credit Crisis, for example). That said, those overweighting value companies and focusing on shorter-dated bonds will find themselves in better space than most, though this is little consolation when returns are still negative in an absolute sense. Investing is never a straight-line journey.

Sensible, systematic portfolios comprising a diversified basket of equities – with tilts to value and smaller companies – paired with short dated high-quality bonds – from low risk to high risk – will have provided better results than most other solutions in 2022. Such solutions outperformed over 70%[1] of professionally managed multi-asset funds over the 12 months due to these portfolio decisions.

Investors with portfolios denominated in GBP have benefited from the strong performance of the US dollar, which has meant overseas assets translate back to more in GBP terms. In USD terms (which is often reported in the press) global equities fell around 18% in 2022, around 10% more than when viewed in GBP terms. Some of the major US firms like Tesla and Meta which have hit headlines with share price falls of over 70% and 60% respectively in the past year, however, they only represent a small allocation – and thus have a small impact – in a well-diversified portfolio.

The asset class that – uncharacteristically – stole the headlines (for all the wrong reasons) was fixed income. Many bond indices experienced their worst calendar year on record. This was chiefly due to a swift increase in the compensation bondholders demand for lending their capital, on the back of – more persistent than foreseen – high inflation and corresponding rising policy rates from central banks. Rising borrowing costs, and little yield buffer to begin with, have meant absolute falls for fixed income investors, something that few investors will have seen, in a year when equities fell too. The last time was 1994.

The reality is, however, that higher yields are a good thing for investors with time horizons longer than the maturity of their bonds. Over time, the new bonds being invested in have been at a higher yield, providing a larger yield cushion going forward and reducing the chance of absolute falls on an interim basis. Bondholders start 2023 in far better shape – from an expected return perspective – than 12 months prior. Today, 5-year gilt yields stand at 3.5%, as opposed to -0.1% at the start of 2022.

Looking forwards

Uncertainty abounds – it always does. Basing investment decisions on forecasts or judgments is generally best avoided. Forming market outlooks can be used to create accountability, or perhaps at best just for a bit of fun. After stating his column’s 2023 predictions Robert Armstrong, of the Financial Times, questions: ‘Do I have high confidence in any of this? Heck no.’. There is no shortage of seemingly sensible predictions on market performance and global developments[2], nor any effective method to separate those that will be more or less accurate.

Investors should therefore look to the future with the anticipation that new information will come to light, and markets will react quickly to take it into account. Without the ability to profit directly from superior information one, therefore, should construct a diversified portfolio built to weather all storms, guided by an ever-growing body of academic literature. If, for example, inflation or growth come in higher or lower than expected, some parts of the portfolio will – by design – be helping, and others detracting from, performance.  That is what diversification is!

With the reasonable belief that risk and reward go hand in hand, each day it should be expected that incremental risk taking in a portfolio will be rewarded, such as owning equities or bonds over cash. However, on a daily (or even multi-year) basis – which in the context of a true investment time horizon is miniscule – the expected daily reward is dominated by unexpected noise, which can be positive or negative.

And finally…

This note has focused on investing. Outside of investors’ portfolios, Putin continues wage his illegal war in Ukraine and much of the world is feeling the repercussions of the supply chain impacts. The NHS is under considerable strain. Increasing borrowing costs and a higher cost of living place pressure on many of us. These challenges provide a stark reminder that we should be grateful for what we can be. News outlets have a bias towards reporting bad news, which is hardly surprising. Bad news sells.

Nicholas Kristof of the New York Times plainly states that journalists ‘report on planes that crash, not planes that land’ and writes[3] a column on some significant achievements made by the human race in 2022. For example, solar power is now on track to overtake coal as the world’s leading power source in the next five years. Time away from day-to-day news can help one feel more positive or reading information from news outlets such as Good News Network®[4] can be a refreshing exercise. Enjoy a fulfilled 2023 and all the better news it may bring.

From an investing perspective, we are hopeful for the best in 2023 and beyond but remain prepared for the worst.

Risk warnings

This article is distributed for educational purposes and should not be considered investment advice or an offer of any security for sale. This article contains the opinions of the author but not necessarily the Firm and does not represent a recommendation of any particular security, strategy, or investment product.  Information contained herein has been obtained from sources believed to be reliable but is not guaranteed.

Past performance is not indicative of future results and no representation is made that the stated results will be replicated.

Data series used

Asset class Fund ISIN Weight in P60
Gbl market Fidelity Index World P Acc GB00BJS8SJ34 27.5%
Gbl value Dimensional Global Value GBP Acc IE00B3NVPH21 9.2%
Gbl small cap Vanguard Glb Small-Cp Idx £ Acc IE00B3X1NT05 9.2%
EM iShares Emerging Mkts Eq Idx (UK) D Acc GB00B84DY642 4.9%
EM value Dimensional Emerging Mkts Val GBP Acc IE00B0HCGX34 1.6%
EM small cap iShares MSCI EM Small Cap ETF USD Dist IE00B3F81G20 1.6%
Gbl property L&G Global Real Estate Div Index I Acc GB00BYW7CN38 6.0%
Short, high qual bonds Dimensional Global Short Dated Bd Acc GB0033772848 36.0%
UK 1-5 gilts iShares UK Gilts 0-5yr ETF GBP Dist IE00B4WXJK79 0.0%
UK IL gilts Dimensional £InflLnkdIntermDurFI GBP Acc IE00B3PVQJ91 4.0%

Weights for each portfolio are pro-rated up/down according to portfolio equity allocation. Fixed income funds in blue, equity funds in green. More information is available on request.

[1] Source: Albion Strategic Consulting. Systematic portfolios breakdown found in endnotes.

[2] Armstrong provides a list of outlooks from several significant market participants:



Value Worth Waiting For

Sensible investing is about taking on sensible risks in your portfolio, which starts with owning equities over cash.  Historical data and logic tell us to expect a premium for doing so. In the long run this has been in the region of 3% to 4% per annum.  It may not sound much, but when compounded over time it has an amazing beneficial impact on the level of wealth accumulated, and therefore life choices that can be made.  Let’s generously assume that cash delivers 1% p.a. above inflation and equities deliver 5% p.a. above inflation.  A sixty-year-old, perhaps approaching retirement, should be planning to live 100 these days. Investing in cash they would turn £1,000 of purchasing power into £1,500, whereas if they had invested in equities, £1,000 would be worth a little over £7,000.  That provides materially greater choices and fewer worries about money.

The challenge that all investors face is that to capture these returns, owners of equities (part shares in real companies) is that they are likely to experience some tough times in the markets. The average 20-year global equity exposure (since 1955) turned £100 of purchasing power into around £250[1]. Although one unfortunate cohort of equity investors saw £100 turned into £85 over 20 years.  In fact, on any one day you have something like a 1-in-2 chance that the equity risk premium will be negative, but over 5 years this falls to 1-in-8, and to around 1-in-10 at 10 years.  The longer the period of time invested for, the greater the likelihood – but never the guarantee – that returns will be positive.

Investors could capture the returns of global equities using a cheap single index-tacking fund that captures the returns from global markets.  It is certainly not a bad place to start, a view supported by Eugene Fama, renowned for his work on efficient markets for which he earned himself a Nobel Prize in Economics:

‘You’ve got to talk your way out of a market cap weighted portfolio’

There are some conversations – led by Fama himself – that suggest that owning overweights – or tilts – to specific parts of the market that have higher risks and thus higher expected returns may be one occasion to step away from markets, for those who have a preference to do so.  These incremental returns, as we have seen above, are valuable to investors.

One such ‘risk factor’ is the ‘value’ premium, which is incorporated into portfolios.  Accepting that markets work pretty well, incorporating information into prices efficiently (again another useful assumption to make), their prices must hold some useful information.  Comparing equities to each other, scaled by either a balance sheet or profit and loss item, such as book value or earnings, allows us to rank them into ‘cheaper’ or ‘value’ stocks (e.g. low price relative to book value) and ‘expensive’ or ‘growth’ stocks (being the opposite).  Given that the price is right (markets work) value stocks are not cheap in the ‘it’s a bargain’ way, but cheap because something else is going on.  That something else is higher risk.  However, the flip side of higher risk is higher return, which is evidenced in the historical data.  It works across different time periods, markets and even asset classes. Different measures (e.g. price-to-cashflow, price-to-earnings, price-to-dividends) all work as robust measures of value.  It has also been shown that the value premium can be extracted successfully in real, live funds.

Like the equity premium, extended periods of time can occur when the value premium is negative.  Over the ten or so years to the end of 2020, owning value stocks was a tough place to be in a relative sense as growth stocks that became more and more ‘expensive’, despite delivering strong absolute returns.  Some investors may have abandoned their value stocks, as they could not take the relative pain.  As they sell them and go underweight value stocks, someone else has to be persuaded to buy them and hold the overweight position, improving the latter’s expected returns (remember it’s a zero-sum world out there).  You get paid for holding stocks that kick you when you are down!  However, if you hold a robust premium that meets stringent hurdles – as value does – the key is to hold not fold.

Take a look at what has been going on lately. Value stocks have been clawing back some of their relative underperformance to the broad market, delivering strong returns in markets where growth (‘expensive’) stocks have fallen hard in 2021-2, dragging down the broad market, not least in the US.  This strong positive premium has been as seen in emerging markets too.

Figure 1: Global value has been delivering a positive premium of late

Data: Dimensional Global Value Fund Acc. in GBP and Vanguard FTSE Developed World UCITS ETF (VEVE)[2].

Steeping away from the market takes courage and discipline but is likely to be worth the wait.  One swallow does not make a summer, but positive outcomes are always welcome.

Risk warnings

This article is distributed for educational purposes and should not be considered investment advice or an offer of any security for sale. This article contains the opinions of the author but not necessarily the Firm and does not represent a recommendation of any particular security, strategy, or investment product.  Information contained herein has been obtained from sources believed to be reliable but is not guaranteed.

Past performance is not indicative of future results and no representation is made that the stated results will be replicated.

[1] Albion Strategic Consulting (2021) – internal analysis.

[2] Note that these two funds have been used purely for educational purposes and reference to them should not be construed as any form of recommendation.

Pacem Shortlisted for 3 Eastside Awards!

Pacem is delighted to announce that we have have been shortlisted in three categories for the 2022 Eastside Awards.

The Eastside Awards exist to showcase the best in East Belfast and Pacem is a proud recipient of the ‘Eastside Award for Employer of the Year’ in 2020 and a double award recipient of both the ‘Eastside Award for Employer of the Year’ and ‘The Eastside Award for Business Growth in 2021’.

Speaking on what it means to win and Eastside Award and to be shortlisted again in 2022, Daniel Glover, MD at Pacem said: “We first heard about the Eastside Awards through East Belfast Enterprise as we were providing some accountancy advice to some of the early-stage businesses in the building. As someone who both resides, and works in the East Belfast area, I instantly thought it was a fantastic initiative to showcase some of the many vibrant businesses and people in the area. Over the years we have experienced a period of rapid growth, going from a team of 3 to 19, and we thought it would be great to enter the awards to showcase how far the business has come and grown in a short space of time. We brought the team to the gala dinner at the Stormont hotel where we were delighted to find out we had won ‘Employer of the year’ in 2020 and then again in 2021 along with the award for ‘Business Growth’, we had a fantastic night out with the team on both occasions celebrating all of their hard work and efforts over the years. He continued: “We have worked exceptionally hard on growing the business and developing a fantastic team and it is great to have that hard work and effort publicly showcased. The strength of our team combined with coordinated wealth planning and accounting services, are what sets Pacem apart from our competition and drives our continued success and we are looking forward to bringing the team along the the Gala dinner on 27th January to celebrate not just our success, but the successes of all the other worthy finalists who are making East Belfast a better place to live, work and play”.

The full list of the 2022 Eastside Awards in association with George Best Belfast City Airport finalists are:

Eastside Award for Apprentice of the Year sponsored by Wolseley Plumb & Parts:

Benjamin Bennett, Horatio Todds; James Mallin, Totalis; Jordan Sloan, Titanic Hotel Belfast

Eastside Award for Best Organisation to Work For sponsored by Fleet Financial:

Ashfield Girls’ High School; Connswater Homes; Pacem

Eastside Award for Business Start Up sponsored by Belfast City Council:

Bullhouse East; Joob Joobs; Murphy & Bailey

Eastside Award for Business Growth sponsored by We’resure Insurance Services:

Art Loves; La Bella Vita; Pacem

Eastside Award for Community Impact sponsored by Belfast Harbour:

EastSide Greenways; East Belfast Street Team; In This Together

Eastside Award for Contribution to the Arts sponsored by Millar McCall Wylie:

Ajendance NI; The Bright Umbrella Drama Company; The Gertrude Star Flute Band, Fifes & Fusion

Eastside Award for Environmental Sustainability sponsored by Kainos:

Davines; Pacem; The Wardrobe

Eastside Award for Excellence in Health and Wellbeing sponsored by Better Gyms:

Ashfield Girls’ High School; Helping Hands Autism Support Group; Jump Jiggle and Jive

Eastside Award for Favourite Classroom Assistant in East Belfast sponsored by Belfast Live:

Gary Chambers, Lough View Integrated Primary School; Kirstie Shaw, Ashfield Girls’ High School; Stephanie Wilson, Ashfield Boys’ High School

Eastside Award for Favourite Eatery (Café/Restaurant) in East Belfast sponsored by Solv Group:

Bodega Bagels; Gardener’s Rest at Hillmount; Lazy Claire Patisserie

Eastside Award for Favourite Teacher in East Belfast sponsored by The Open University:

Suzanne Greenwood, Orangefield Primary School; Mr Pollock, Elmgrove Primary School; Brendan Shannon, Lisnasharragh Primary School

Eastside Award for Sports Initiative of the Year sponsored by Phoenix Natural Gas:

CIYMS, Men’s Hockey Club; Titanic Tigers Special Olympics Club; Tullycarnet Boxing Club

Eastside Award for Tourism Experience sponsored by EastSide Partnership:

Glentoran in the Community; Scott’s Jazz Club; Titanic Hotel Belfast

Eastside Award for Young Person of the Year sponsored by George Best Belfast City Airport:

Ryan Jamison, Refresh Property Solutions Ltd; Lisa Jiang, Ashfield Girls’ High School; Rachael McDowell, Ashfield Girls’ High School

Eastside Award for Volunteer of the Year sponsored by East Belfast Mission:

Susan Gillen, Titanic Tigers Special Olympics Young Athletes Club; Rachael McDowell, Ashfield Girls’ High School; Chloe O’Neill, Youth Initiatives

Hosted by television presenter Tara Mills, winners will be announced at the glittering celebration in Hastings Stormont Hotel on Friday 27 January 2023.