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Time in the market

John Baron reminds readers of the importance of staying invested.
March 3, 2016

When markets are volatile, it is worth remembering tried and trusted investment principles. One of the most important is to stay invested as long as such an approach reflects one’s financial requirements and risk profile. These can be trying times, but take comfort from the evidence which suggests that time in the market is better than market timing.

The importance of humility

As regular readers will know, I do not try to time markets. I leave that to wiser investors. Instead, I stay invested but seek to add value over time by investing in regions, themes and special opportunities which look attractive relative to the alternatives – whilst recognising the need for such an approach to be embraced within a structured portfolio which reflects investment objectives.

Concerned investors need to remain focused on equities’ long term returns. The 2015 Barclays Equity Gilt Study shows that over 115 years equities have delivered a real return over inflation of 5.0 per cent per year, compared to 1.3 per cent for gilts and 0.8 per cent for cash. In any 10 year period, gilts have beaten equities only once. In fact, over the last 100 years there has only been one decade when equities produced a negative real return, and several when cash and gilts did so.

This makes sense. Good companies should be growing profits faster than prevailing interest rates. Otherwise, what is the point of being in business – entrepreneurs might just as well put their money in the bank and avoid risk? And, all things being equal, shareholders should share in this success.

 

 

But the path is rarely a smooth one. This is why a long term horizon is recommended. The longer one is invested, the more likely a positive return will result. Research from Fidelity has shown that over the period 1980-2012, investing in global equities for 12 years or more produced no negative returns. By comparison, five year periods produced a 16 per cent chance of a negative return.

And in embracing the long term, it is important to stay invested. A few years ago Fidelity also showed that missing out on just the 10 best trading days of the MSCI World Index over a 10 year period from 31 December 2002 would have resulted in negative returns of -4.6 per cent. Had an investor missed the best 20 days then the negative return would have extended to -32.1 per cent.

Some might say one would have to be pretty unlucky to miss all the good days. But evidence suggests some investors have a tendency to buy after markets have risen, and to sell when they have fallen - and then to remain in cash for too long. Markets often rise when sentiment is depressed – when the bad news is in the price. Barclays has highlighted that in the period 1992-2009, investors who tried to time the market were down 20 per cent compared to those who had simply stuck with it.

So ignore the noise and chatter. Treat the market with respect and approach it with humility. If you stay loyal, it will reward; but stray, and it will punish. Remain invested provided your investment horizons are long term. And remember that by staying invested one can fully reap the rewards of dividend income - which accounts for the majority of investment returns over time.

But this is not an ‘idle’ approach – quite the contrary. In remaining invested, one must be diligent in monitoring one’s portfolios and seeking out attractive investments.

North Atlantic Smaller Companies Investment Trust

The objective of North Atlantic Smaller Companies (NAS) is to provide capital appreciation by investing in a portfolio of smaller companies principally based in countries bordering the North Atlantic Ocean – the majority being in the UK. It has a significant exposure to unquoted investments and presently sits on a large cash pile. It is run by Christopher Mills, of Harwood Capital, who owns around 30 per cent of the company. NAS also has a 42 per cent stake in Oryx International Growth Fund (OIG) which he also runs.

The range of businesses in which NAS invests varies from biotech to housebuilder, but the objective is the same – to understand the business well and identify an opportunity, to take a significant stake, and then to influence how the business is run and work with management as necessary to crystallise value. This private equity approach can involve placing a Harwood member on the Board if deemed necessary.

NAS’s focus on unquoted companies could become increasingly apposite. In the past, most companies would automatically have looked to the stock market to raise funds for expansion. Partly because of advances in technology, these companies can now expand at a much lower cost and faster rate – to the point where they can choose their shareholders. As I’ve commented before when highlighting the threat to their larger brethren, the future is indeed small.

 

 

Speaking with Christopher recently, it is fair to say NAS is cautious in its outlook and presently has around 30 per cent of assets held in cash or cash-like investments. However, this has not prevented it from performing well relative to the smaller company indices on both sides of the Atlantic and to its peers. Meanwhile, NAS is well positioned to take advantage of market weakness – and intends to do so.

Christopher is a ‘conviction’ fund manager and has recently and materially added to his already significant stake at similar levels to when I introduced NAS to the Growth portfolio last month. Overall, an excellent track record, a committed fund manager operating in an attractive area of the market, with plenty of firepower in reserve, and a 19 per cent discount when bought, all suggest this is an attractive investment – I bought a larger weighting of NAS in my website’s Thematic portfolio.

Other portfolio changes

To help fund the purchase of NAS in the Growth portfolio, during February I sold JPMorgan Mid Cap (JMF) when standing close to NAV. JMF remains an excellent trust and retains its position in the Income and other website portfolios.

With the balance of the monies raised, I also added to the Growth portfolio’s existing positions in Ishares Corporate Bond ex-Financials ETF (ISXF), New City High Yield Fund (NCYF) and Standard Life Property Income (SLI). Regular readers will be aware of my sanguine view of good quality bonds – as highlighted again in my recent column ‘Reflecting on a good 2015’ (8 January 2016). Meanwhile, I remain positive on Commercial property. Overall, such changes are modestly defensive.

I also added to the Income portfolio’s holding of NCYF during February.