It is pleasing to report that the portfolios performed well during 2017. The Growth portfolio gained 19.7 per cent compared with 11.3 per cent for its MSCI WMA Growth benchmark, while the Income portfolio was up 17.0 per cent compared with 9.2 per cent for its MSCI WMA Income benchmark. All figures are total return and rounded to one decimal place. A number of the portfolios’ holdings did particularly well, while their bond, property and other less correlated exposure helped to provide diversification and income.
Furthermore, as the table on the following page shows, this outperformance builds on their longer-term record. Since the portfolios’ inception in 2009, the Growth portfolio has returned 266.2 per cent compared with its benchmark return of 148.7 per cent, while the Income portfolio has returned 205.5 per cent compared with 115.1 per cent for its benchmark.
Predictions and principles
The start of any new year usually ushers in a swathe of predictions as to what is in store, but investors should remember to be wary of analysts’ forecasts as to market levels at the year-end. As The Wall Street Journal recently highlighted, since 2000 the average S&P 500 forecast has more often than not missed the year-end index level by an amount larger than the S&P’s long-term average annual gain of 9 per cent. Very few analysts predict bear markets and many tend to underestimate the upswings.
History suggests economic forecasts are rarely better. The renowned economist JK Galbraith once said: “Pundits forecast not because they know, but because they are asked.” Most did not predict the financial crisis of 2008-09. The very public back-peddling by the Bank of England, the International Monetary Fund and other organisations following their gloomy predictions should the UK vote to exit the EU is another case in point. Trying to predict perhaps the greatest variable of all – human behaviour – is almost futile.
Instead, investors should remain loyal to tried-and-tested investment principles. When deciding the portfolios’ strategy, little attention is paid to short-term market ‘noise’ – from wherever it originates. The most important determinant is the ability of companies to create wealth and add value, and the conditions that sustain such an environment. The focus remains on the longer term when assessing sentiment and fundamentals, and volatility is therefore seen as an opportunity.
The portfolios remain invested and seek to add value over time – wiser investors are left to try to time the markets. Such an approach also allows the full harvesting of dividends, which become an increasingly important contributor to total return – the portfolios’ higher yield, relative to benchmark, acknowledging the significant role played by income over time. In helping to protect past gains, the portfolios also acknowledge the importance of rebalancing and diversification as time passes – both remaining undervalued disciplines.
Meanwhile, a ‘holistic’ view is taken of the portfolios. Changes should not solely be seen in isolation – as simply a list of individual trades – but rather as part of the whole, as portfolio management usually reflects a range of factors. The portfolios also adhere to the principle that investment is best kept simple to succeed. Complexity adds cost, risks confusion and usually hinders performance.
In the round, such an investment approach perhaps allows for a calmer assessment of opportunities, and recognises the importance of maintaining poise and purpose when markets go awry. While never complacent, it is an approach that will continue to guide the seven (soon to be eight) real portfolios on the website www.johnbaronportfolios.co.uk, including the two covered by this column.