Politics and Portfolios

It feels like 2024 is the year of the election with over 64 happening in various countries around the world covering around 50% of the world’s population[1]!  These range from the farcical pretense of the re-election of Putin, to that in the UK.  At this time, it looks like a probable victory for the Labour party over the incumbent Conservatives, seemingly with a large majority.  In the previous election in 2019, British politics was polarised between Boris Johnson’s ‘getting Brexit done’ mantra and a very left-wing alternative of Jeremy Corbyn and his ‘magic money tree’. Today, the two main parties are vying for far more central ground that tends to win elections. Who said democracy does not work?

In India, the world’s largest democracy, the people have spoken and have put a dent in the BJP and Modi’s ambitions of an overwhelming 400 seats.  They gained just 240 instead, without a majority.  The EU Parliament elections are due to begin, with concerns over the growing impact of the far-right.  Throw in the US election chaos in November and investors might wonder how to process all of this in terms of what might happen to their portfolio.

Well, the good news is that the markets have done this already for you!  It is no doubt, for example, pricing in the probability of a Labour government and what it thinks about its policies, as far as they are known. That is what markets do.  They incorporate all public information into prices quickly and efficiently, meaning that prices only move on the release of new information, which is random.  The stock market tends to be pretty resilient for those with the patience to sit out any passing market storms.  It seems to be obligatory at these times to roll out a chart with the colours of the different parties indicating the periods they are in power – say in red for Labour and blue for Conservative – and showing the growth of the market.  It does not tell you much, apart from these events have little impact, as the market prices in events well before they happen.  So here it is.

Figure 1: The UK market’s growth of wealth over time, irrespective of who is in power.

Source: Albion Strategic Consulting. Data: CT FTSE All-Share Tracker 1 Inc (GB0008464199) from 01/10/1988, Vanguard FTSE UK All Shr Idx Unit Tr£Acc (GB00B3X7QG63) from 01/01/2010. Not a recommendation. Data in GBP in nominal terms. Election results data from House of Commons Library.

It really is pointless to try to predict an outcome any different to that already reflected in today’s market prices.  What is your thesis? How have you interpreted the information that you have to hand? How is your view different to everyone else who is thinking similar thoughts?  The reality is that is really hard to outguess the market view reflected in prices.

As you see from the figure above, these periods of political power are plotted against the UK market. But what does that tell you? Over 80% of the earnings of the UK market come from overseas, so how meaningful is it to just look at UK politics. Not only that, but the UK is likely to represent only a fraction of your global portfolio, as it only represents around 4% of total world market capitalisation.  So, you will need to factor in all 64 elections, all other world events known and as yet unknown and decide how to position your portfolio accordingly.

Alternatively, you could be patient, trust that the markets work pretty well and reflects the aggregate view of all investors and believe in the power of capitalism to deliver rewards due to you as the part owner of companies (equities) and as a lender (bonds).  We advise the latter approach.

The most important thing you can do is to vote.


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 and does not constitute any form or recommendation or advice. 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] TIME (2023) The Ultimate Election Year: All the Elections Around the World in 2024.

2024 – Looking Backwards and Forwards

Over the longer term, investors expect a positive, after inflation return from investing in company shares and lending money to governments and companies by owning bonds.  Unfortunately – and inescapably – in the shorter-term market returns are anything but predictable. They contain a lot of noise, as the market absorbs new information into prices.  High inflation in 2022 led to a rapid rise in interest rates around the world, contributing, in part, to the fall in global bond and equity prices. It was a painful backward step and a reminder that the road to long-term returns can be bumpy and painful at times. With these now higher yields, some investors may have been tempted to hold more cash but roll forward a year and that would have been a poor decision in the short term.  It is nearly always a bad decision in the long term for those with long investment horizons.  Fortunately, 2023 has delivered a much more positive story.

Looking Backwards

Last year all core assets delivered positive returns. The US market – and in particular the ‘Magnificent Seven’ as the press have dubbed the big tech firms – regained the losses they suffered in 2022.  In fact, they contributed around three quarters of the return of the US market over the year.  As a consequence, global developed market returns were very strong, given that the US weight in global markets is around 63%. Value companies underperformed in the US (largely because of the overwhelming impact of the ‘Magnificent Seven’) but made a strong contribution outside the US.  Both value and smaller companies outperformed strongly in emerging markets. Global commercial property (REITs) also managed a positive return.

On the defensive side of portfolios, high quality, short-dated bonds have recouped over half of the falls suffered in 2022 – largely on account of the higher bond yields, which caused the pain in 2022 – delivering returns similar to cash.

Figure 1: Global investment returns – 2022 and 2023 compared

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

Sensible, systematic portfolios comprising a diversified ‘growth’ basket of equities – with tilts to value and smaller companies – paired with ‘defensive’ short dated high-quality bonds will have delivered robust returns in 2023, somewhere in the region of 9% for a 60/40 split respectively in GBP terms[1]. Investors with portfolios denominated in GBP suffered a small currency drag over the year as Sterling appreciated against the US Dollar by around 4%, as well as most other major currencies.  Year-on-year inflation in the UK fell to 3.9% in November, down from 10.5% at the start of the year.

Looking at three-year cumulative returns helps to illustrate the benefit of remaining invested through tough years such as 2022. Bond returns have been poor due to starting yields around 0% at the start of the period followed by subsequent yield rises (and thus bond price falls), but these were more than compensated for by strong growth asset returns.

[1] Refer to table in the endnote for underlying funds and allocations.  This is provided for informational insight only and does not represent any form of advice or recommendation.

Figure 2: Cumulative global investment returns – three years to the end of 2023.

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

Looking Forwards

The outlook for the global economy looks a little bleak as major economies teeter on the brink of recession, including the UK.  China has deep and wide economic problems that are restraining its growth prospects.  Inflation has come down in the EU (2.4%), US (3.1%) and UK (3.9%) from recent double digit highs.  Risks remain – including conflict in the Middle East impacting energy and supply chains –and the final yards to reach central bank target levels of inflation (2% in the UK) will be harder to achieve and vulnerable to geopolitical risks.  Interest rates may well remain elevated relative to the low rates that investors experienced up until early 2022, which is good for bond holders.

It is useful to remember that forward-looking views are already reflected in today’s prices.  What comes next, no-one truly knows. The key is to remain highly diversified, resolute in the face of any market set-backs and focused on long-term goals.

And finally…

More broadly, Putin continues to wage his illegal and brutal war in Ukraine and the terrible humanitarian tragedy unfolding in Gaza seems to have no resolution in sight. Our thoughts are with all the innocent people caught up in these conflicts.

This year we face the prospect of elections in democracies such as the UK, US, Taiwan, India, Pakistan, Indonesia, and within the European Union.  US politics is as deeply partisan as it has ever been, raising the level of uncertainty about the future.  The democratic process is always combative, often messy and sometimes ugly.  Let us hope that these elections result in governments that fulfil Lincoln’s wish set out in his Gettysburg Address after the Battle of Gettysburg in 1863:

‘that these dead shall not have died in vain—that this nation, under God, shall have a new birth of freedom—and that government of the people, by the people, for the people, shall not perish from the earth.’  

In the UK, it is certainly possible that the Conservatives will struggle to remain in government.  As Churchill once said:

‘Many forms of Government have been tried and will be tried in this world of sin and woe. No one pretends that democracy is perfect or all-wise. Indeed it has been said that democracy is the worst form of Government except for all those other forms that have been tried from time to time.…’

Winston S Churchill, 11 November 1947 

On a brighter note, it is worth remembering that despite the conflicts in the world, seeming discourse in democratic nations and the rise of autocratic and despotic leaders, the world we live in is better in many respects than ever before.  While 659 million of the world’s population live in poverty, this is down from 1.9 billion in 1990 and 902 million in 2012[1].  Global under-5 mortality has dropped by 60%, 2.1 billion people have gained access to safe drinking water since 2000 and today 40% of board seats in FTSE 350 companies are held by women (10 years ago 150 or so of these companies had no women on their boards)[2].  These lesser known facts are a strongly positive counterbalance to the immediate troubles that the world faces.

From an investing perspective, we remain hopeful for the best in 2024 but remain prepared for the worst, as is always prudent.

Happy New Year!


[2] Sunday Times magazine, December 31, 2023. ‘Really, actually, properly excellent things that happened in 2023’

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 P60/40
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%

More information is available on request.

A Tribute to the Wisdom of Charlie Munger

Charlie Munger, the lifetime business partner of Warren Buffett at Berkshire Hathaway, passed away in late November at the ripe old age of 99.  He was a deep thinker about business, who focused on the fundamental strengths of companies exhibiting a simplicity that he could understand.  Although he was less high profile than Warren Buffett, he is credited with changing Buffet’s approach of buying ‘fair companies at wonderful prices’ to buying ‘wonderful companies at fair prices’.

He and Buffett delivered investors with stellar returns of +10% above the S&P500 index (1964-2022) [1], although the past two decades have been far more challenging, delivering the return of the market.  He amassed great personal wealth through the investment returns of Berkshire Hathaway [2] – compounded over a long period of time – but gave the majority of it away to philanthropic works.   In tribute, we look at a number of his well-known quotes.

Make yourself into the person you want to be.

A key driver of his personal philosophy was deciding on the person you want to be and then making sure that you become that person.  He summed this up nicely as follows.

Early on, write your desired obituary — and then behave accordingly.

He was also focused on lifelong learning. He and Buffet both read voraciously every day and set aside time for thinking as opposed to doing.  His advice was to go to bed smarter than when you woke up.

His thoughts on investing

His take on investing was that it was a long-term game where you make your choices, have the courage of your convictions, stick with it through thick and thin, and reap the rewards of time and compounding, avoiding emotional and financial costs along the way. Sounds familiar!

A lot of people with high IQs are terrible investors because they’ve got terrible temperaments. And that is why we say that having a certain kind of temperament is more important than brains. You need to keep raw irrational emotion under control. You need patience and discipline and an ability to take losses and adversity without going crazy. You need an ability to not be driven crazy by extreme success.

(Charles T. Munger, Value Investing: A Value Investor’s Journey Through the Unknown.)

Understanding both the power of compound interest and the difficulty of getting it is the heart and soul of understanding a lot of things.

(Poor Charlie’s Almanack)

His reference to ‘getting it’ includes financial and emotional cost leakage, not least chasing returns and trying to time markets, instead of sticking to a well-thought-out strategy.

When he and Buffet began their relationship at Berkshire in the 1960s the investing world was very different, with many more retail investors and fewer sophisticated institutional investors.

There is so much money now in the hands of so many smart people all trying to outsmart one another. It’s a radically different world from the world we started in.

(2023 Berkshire Hathaway Annual Meeting)

The implication is that markets are probably more efficient, meaning that bargains are far rarer for active managers.  Berkshire’s size, and the greater efficiency of markets, has probably underpinned their more lackluster performance in the past two decades.

Even back in 1994, he saw that the investment management industry had become a factory churning out glistening products that appealed to the investment magpies, particularly faddish products designed to chase yesterday’s returns.

I think the reason why we got into such idiocy in investment management is best illustrated by a story that I tell about the guy who sold fishing tackle. I asked him, ‘My God, they’re purple and green. Do fish really take these lures?’ And he said, ‘Mister, I don’t sell fish.’

(A Lesson on Elementary, Worldly Wisdom as It Relates To Investment Management & Business, 1994 speech at USC Business School)

Today, there are over three million (yes, that is correct!) indices available to investors and more equity mutual funds available than there are listed companies in the world.  This is the ‘idiocy’ to which he refers.  In reality, a sensible, systematic approach to investing requires only a handful of funds to capture market exposures and make evidence-based, long-term risk factor tilts.

One fundamental difference between Charlie Munger’s approach to investment and that of a systematic investor relates to diversification.

The worshipping at the altar of diversification, I think that is really crazy…I find it much easier to find four or five investments where I have a pretty reasonable chance of being right that they’re way above average. I think it’s much easier to find five than it is to find 100. I think the people who argue for all this diversification — by the way, I call it ‘diworsification’ — which I copied from somebody — and I’m way more comfortable owning two or three stocks which I think I know something about and where I think I have an advantage.

(2021 Daily Journal Annual Meeting [3])

At one level he is right.  Long-term market returns are driven by just a handful of stocks.  Research suggest that around 4% of US companies have driven all of the returns of the US market since 1926 [4].  At another level, for most investors he is probably not right, even if it was right for him.  The challenge for investors is picking these stocks.  Perhaps in a time when markets were less efficient and with two deep, investment obsessed investors working on the problem, then finding at least a few of these companies may have been possible.  But for the vast majority of investors, the only way they can guarantee to pick these winning firms is to own the entire market.  The cost of getting it wrong is too big to contemplate and few have the time, insight and fortitude to risk doing so.  As his partner Warren Buffett once said:

By periodically investing in an index fund, for example, the know-nothing investor can actually out-perform most investment professionals. Paradoxically, when ‘dumb’ money acknowledges its limitations, it ceases to be dumb.

(Berkshire Hathaway shareholder letter 1993.)

Charlie Munger will be remembered as one of the great ‘active’ investors and a man of humility and integrity. People like him are few and far between.

Charlie Munger (1924-2023)


[2] At the time of his death his shares in Berkshire Hathaway were worth US$2.6 billion but the records show that at one point he owned shares worth in excess of US$10 billion, sales of which have funded his philanthropic endeavours.

[3]      The newspaper publishing company he chaired from 1977 through 2022

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

If you have any questions or queries about anything in relation to the nature of this blogpost, you can contact

Investment impact of the unfolding tragedy in the Middle East

Everyone has been touched by the horrific events and unfolding human tragedy in Israel and the Gaza Strip, and many are concerned by how this might escalate into a wider conflict at a time of great uncertainty in the world. People’s immediate focus is, rightly, on the plight of those caught up – either directly or indirectly – in the maelstrom of the conflict. We can only hope that some form of peaceful solution can be arrived at quickly, however hard or unlikely this may seem.

At such a time, it may feel a little inappropriate to be worried about the impact of ongoing events on investors and their portfolios.  Yet, with many people feeling a great degree of uncertainty about the geopolitical events around the world, the cost of living crisis, the state of politics in many countries, not least the UK and the US, providing some reassurance may be welcome.

In the days since the weekend’s tragic events, the Israeli stock market has fallen by around 7%, in part due to the fall in the Israeli currency (the shekel).  From a portfolio allocation perspective, the Israeli equity market (classified as a developed market) is only around 0.15%[1] of the world equity markets (developed and emerging markets combined).  As such, any direct impact from the Israeli stock market will be negligible in a well-diversified portfolio.  So far, other asset classes have not been materially affected. That is the easy part.

Figure 1:  Asset class returns from 06-10-2023 to 11-10-2023

Morningstar Direct © All rights reserved. See footnote for data uses[2]. In GBP terms.

The hard part is trying to evaluate what the possible geopolitical, economic and investment market scenarios are that lie ahead and the likelihood that they might occur.  At this point, the human mind (not least those of market commentators) tends to work overtime, trying to make sense of the vast interconnected nature of possible outcomes, by making up plausible stories.  These tend to be in the form of conditional probability narratives starting with ‘If A happens, then the impact on B could be material, which could lead to C falling’.  (In one possible scenario A = oil price rise, B = higher inflation, C = bond prices).  Worrying news headlines can ensue.  The question is, what can one do with such information? The truthful answer is not very much.

Fortunately, systematic investors with relatively long horizons can largely ignore these narratives and rely on the fact that they are all, in aggregate, already reflected in today’s market prices.  Unless an investor has better information (or uses information better than others) they should probably not try to outguess markets at a time like this and remain sensibly invested in their long-term strategy.

Things could end up worse than expected and equity markets might fall.  No-one knows.  There could be a flight to safe haven assets such as US Treasuries which would force yields down and bond prices up.  Again, no-one knows.  What investors with highly diversified portfolios do know, however, is that the countries, sectors and individual companies they own are many and varied and the bonds they hold are generally pretty defensive.  This broad diversification should see them through any investment storms that they might encounter, today or in the future, as it has done successfully over the decades. As the chart below shows, investors who remain invested should be rewarded over time.

Figure 2: Global equities and world events Aug 1998 to 11 Oct 2023

Data: Morningstar Direct © All rights reserved – Global equities – Vanguard Global Stock index $ Acc. In GBP

The key is not to make any emotionally driven decisions – perhaps influenced by media headlines or your own narratives – and to remain invested.  If necessary, get in touch with your adviser who will be happy to talk things through with you.

We hope for better times ahead for everyone.

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 and does not constitute any form or recommendation or advice. 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.

If you have any questions or queries about anything in relation to the nature of this blogpost, you can contact

[1]     Based on its allocation in the iShares MSCI ACWI ETF USD Acc

[2]      Using product data as proxies: iShares MSCI Israel ETF, Vanguard FTSE Emerging Markets ETF, Vanguard FTSE Developed Markets ETF, iShares UK Gilts 0-5yr ETF GBP.  Other: Brent Crude – NYMEX: BZW00, US/GBP Yahoo! Finance.

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.