Neil Birrell, Premier Miton’s Chief Investment Officer and lead manager of the Diversified fund range, looks back at some lessons learnt in 2024.
1. It’s always different this time
Much was made at the end of 2023 and the beginning of 2024 about how the “bubble” created by the Magnificent 7 was a repeat of the dot-com boom at the turn of the century. There were similarities, but there were a lot of very important differences as well, so to compare the likes of Vodafone to Apple or Intel to Nvidia always struck me as wide of the mark.
Of course, there is little doubt that the Mag 7 were trading on high valuations compared to the broader equity market, but that happens for a reason, and it was not a homogenous group, so the band was more likely to split than disappear. We continued to hold Nvidia in the Diversified funds until July, having reduced the position over time, and still hold Microsoft.
I’m not one for expecting history to repeat itself, the world has, and continues, to change.
2. You can make investment decisions based on politics
2024 was the year of the election, with some 3.7 billion people in 72 countries able to go to the polls. I’ve always thought making investment decisions based on potential major political or government policy changes to be a dangerous game. Trying to call political pronouncements or how financial markets might react and making investment decisions as a result is a difficult, potentially brave, move. It’s much easier on minor or specific changes, such as regulation, but difficult on a change of government.
However, this year, we have done so twice, and in quite a big way, with the expectation of profound changes to the economic outlook. In one of the biggest asset allocation changes we have ever made, we reduced the UK equity exposure across the fund range in advance of the Budget. I won’t go into the reasons here, as they are likely to be clear by now. We then moved quickly to significantly increase the US equity exposure immediately post the Trump election victory.
Time will tell if the decisions work, but I’m happy we traded on major political events. That was a new one for me.
3. It’s not all about asset allocation
You will hear CIO’s and multi-asset fund managers, along with consultants and all other investment experts constantly talk about “asset allocation”. It’s fair enough, that’s what we do, allocate the money we look after to different asset classes; bonds, equities, alternatives, property, commodities, gold, cash, cryptocurrencies, real currencies and so on.
However, it’s worth remembering that asset classes are wide ranging. Bonds vary from short dated US Treasuries to junk bonds issued by small corporates in all regions. Equites vary from Apple and BP to micro-caps in frontier markets. I cannot remember seeing such a massive bifurcation within asset classes – to such an extent that it was more important which bit of an asset class you were in than which asset class you were in. The valuation gap in the US between some of the giant companies and the small ones is well known and is a very good example of that. The narrowness of the risk / reward profiles between high quality corporate bonds and high yield bonds made our decision making easy. Why take more risk for little incremental return, when the return on investment grade was so attractive relatively? I guess what I’m saying there is; there is plenty of scope, still, for good active management and decision making.
4. Teamwork … works
Understanding that there is always someone who knows more than you on just about any subject is a good starting point for a fund manager. The Diversified investment team is deliberately structured to have experts managing each asset class and to get their combined input to the big decisions we make on asset allocation. It doesn’t always work, it never will be a certainty, but it gives us a better chance of getting it correct.
This one is definitely a reaffirmation of something I already knew, but it’s good to be reminded.
5. Before you throw in the towel, always think one more time
Our weighting to property companies was painful as interest rates rose and fears over economic growth abounded.
The economic cycle is a real thing, but each one brings different dynamics to previous ones and within cycles there are secular changes taking place, such as the influence of technology or the impact of climate change. These affect real estate as well but listening to what our experienced experts on the subject have to say, the real estate cycle has dynamics of its own and there have only been a handful of occasions over decades when it looked so undervalued. The recovery from the higher inflation and rate environment has started, which makes me pleased we didn’t throw in the towel, as many investors did, in fact we bought more towels!! Now we are looking forward to getting paid for our patience.
6. Volatility isn’t just for equities
When we think about market volatility we always look to equities and are reminded of the stock market crash of 1987, the dot-com bubble at the turn of the century and the Covid-induced crash and recovery. Of course, other asset classes move as well, but it’s usually equities that take the headlines.
Bond fund managers are worriers, always fretting about the next rate move, or default of credit rating change. In 2022 they had plenty to worry about, as yields flew up as inflation and interest rates went in the same direction.
But this year the volatility in markets has been extreme. The yield on 10-year US Treasuries has bounced around between 3.6% and 4.7%. You can’t call bonds boring anymore.
US 10-Year Treasury Bond yield (%)
Source: Bloomberg Finance, USGG10YR Index (US Generic Govt 10 Yr) daily price 01.01.2024 – 26.11.2024. Past performance is not a reliable indicator of future returns.
7. Sustainable profits
Whether you want to call it the “ESG trade” or “sustainable investing”, it has been a painful place to be if you wanted to perform well in 2024. It had its moments, but overall, for a number of different reasons, including economic and political ones, investment returns have prevailed over sustainable investing. That has been matched by investors selling sustainable assets as well as their share prices underperforming.
Maybe that shouldn’t be a surprise, but for most, still, making money is the important thing.
8. I remember when…
… e-mail arrived in our lives. Anyone under the age of 30 thinks it’s been around since electricity has existed and many see an iPhone as a basic human right. They may not understand that the speed at which global connectivity has arrived has revolutionised our lives, society, the economy, businesses, in fact everything, in the developed world and the less developed world.
Artificial Intelligence, particularly Generative AI is likely to do so again. My only advice to those over 30 is; don’t be a luddite, you’ll just be left behind! Maybe we should buy Nvidia back!
9. Japan became interesting again
To be clear, I have been to Japan a number of times, it’s an amazing country with wonderful people, but it’s been relatively easy to ignore as a global multi-asset investor. Government fiscal policy and central bank monetary policy along with demographics and a dull economic backdrop made the equity and bond markets a global backwater following the market collapse in the early 1990s until after Covid.
The equity market was very strong in 2023, on expected and actual policy changes and corporate modernisation, then the Bank of Japan’s major policy shift through this year has brought the country back to the forefront of investors’ minds.
That’s a good thing, there are a lot of interesting opportunities there.
10. Macro vs fundamentals – am I wrong?
All year I’ve been telling anyone who cared to listen and many who didn’t that it was only a case of when macro expectations (inflation, growth, interest rates etc), which have been the biggest drivers of asset prices, in my view, since the global financial crisis, would give way to fundamentals. By that I mean company profitability and credit worthiness amongst a host of other company specific factors.
Over time it is always a range of factors that drive asset prices, either at asset class, regional, sector or specific levels. But macro factors have dominated, meaning the shares prices of very good companies have not reflected how well they have been doing.
I’m beginning to worry that may remain the case, or at least, those macro factors will remain overly influential. I hope they don’t, but it is always different this time.
