Why aren't you doing something?
Updated: Mar 21, 2020
One of our favourite Investment Managers, Tatton, have published the following article which explains why in terms of market turbulence, doing nothing is often the right course of action.
"During times of such unprecedented uncertainty, some of our investors will be asking themselves what active investment management means under the circumstances and what we, as your appointed investment manager, may be doing to manage the impact capital markets are having on portfolio values.So, just as we all want to know what the Government is doing, we would like to answer your questions as to what we are doing. By the way, our operations and investment team remain fully functional with most of the team now working from home.To put our management into context, in times of heightened if not unprecedented levels of uncertainty everybody has a significant urge to ‘do something’ – it is human nature to want to fix something if it goes ‘wrong’. The toilet paper and now general panic buying, against best advice from the government and the supply chain managers, are testimony to this very human notion. Investment managers and portfolio managers in particular face the same pressure when markets and asset classes embark on a wild yo-yo-like pattern of daily movements. However, even if it runs against the human desire to intervene, ‘doing nothing’ is widely accepted as the best approach to a) preserve the volatility reducing characteristics of diversified portfolios vs. direct stock holdings and b) to have portfolios in a position to act at the point when the wild market swings calm and the biggest buying opportunities arise. This does not mean that Tatton’s investment team has been sitting idle. Nothing could be further from the truth. Every day we review the relative weightings across portfolios and reflect against the market developments whether the portfolios’ individual component parts have drifted to a positioning – driven by differing asset class returns – that we deem adequate and appropriate. While we continue to monitor the portfolio as a whole, we are constantly reviewing those individual component parts. Ensuring that the underlying funds which make up our portfolios perform as we would expect through the prevailing market environment. We would expect the active managers to be taking advantage of the recent volatility in markets, but we want to ensure they remain committed to the philosophies we selected them for in the first place.At the moment, our investment committee made the decision that not rebalancing portfolio weights back to previous target weights is the most suitable investment strategy to deal with the current capital market environment - until current uncertainty levels reduce. This approach means that equity exposure across all (bar Global Equity) portfolios has drifted to an underweight position versus the risk profile target weight. Given the heightened levels of uncertainty and resulting volatility this seems reasonable to both lower the relative impact of volatility, but also to keep portfolios invested at levels which mean that when the market sentiment turns, they will fully participate to their previous allocation levels. With a reduction of stock market valuations of over 30% since their February highs, there are arguably buying opportunities appearing in the equity markets. However, we need to understand and accept that uncertainty over the extent and timing of an economic rebound remains exceedingly high and we are only four weeks into this downturn. It is quite likely that we will – even if just temporarily - see lower lows over the coming weeks. Trying to ‘time- the-market’ and trade on short term swings is the reserve of the very highest risk seekers amongst investors. Those with a capacity for risk to lose significant amounts of their capital or miss any short-sharp recoveries that long-term investors will capture when they misjudge the sudden turns of disorderly markets and guess wrong. As long term investors, we will not be drawn into ‘gambling’ with client savings entrusted to our investment management as we firmly believe that ‘time in the markets’ will once again prevail, just as it has done during all previous ‘apocalyptic’ looking global crises.
Best wishes Lothar Mentel CEO Tatton Investment Management Limited CIO Tatton Asset Management"
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