Hedge Clippings | Friday, 28 October 2022
When you're in a hole, stop digging!
There's an old investment adage that goes along the lines of "let your winners run, and cut your losses early". However most fund managers have a stated mandate or strategy, so it's not quite as easy as that, particularly when there's an underlying shift in economic conditions, market direction, or style.
While an individual investor - assuming they have the knowledge or good advice - can adjust more easily, such as by changing sector and stock selections, buying option protection, or moving to cash, (although in truth, many don't - until it's too late) that's easier said than done - without the benefit of hindsight. For many fund managers, while they may have the knowledge or foresight, they are also constrained by the mandate included in the fund's offer documents.
They can mitigate risk to a certain degree by retaining or buying defensive stocks at the expense of those with economic or sector headwinds, but unless they're long/short, have the ability to de-risk through options and derivatives, or have a wider mandate, there's less flexibility available.
This creates issues for investors in those funds as well. Almost all offer documents will indicate that an investment in the fund should be considered over 5 or 7 years to ride out both performance variations and changes to the underlying economic and market conditions. So do you stick with the funds you have, or adjust allocations to meet the market?
The answer to the above dilemma will vary according to individual circumstances, including the level of diversification in an existing portfolio, a view on the ever changing economic outlook, and each individual investor's risk profile. What makes it difficult at the present time is the following broad statistics:
Over 12 months to the end of September:
If we wind the clock back 12 months, how times have changed:
So in the space of 12 months, the best performing sector/peer group has fallen from the top to the bottom performer. Talk about rooster to feather duster!
Statistics of course can prove or disprove anything, depending on what you want other people to believe. Within each of the Peer Groups the individual fund's performances also vary dramatically. What however is the lesson?
Obviously individual fund selection matters, as can asset allocation, and in the above instance, peer group selection. But given those variations and fluctuations, plus a changing global economy, the one over-riding message is diversification. With appropriate diversification, and an understanding of one's risk tolerance, a portfolio should be able to deliver through the cycle.
Fund Monitors' Peer Group Comparison and Analysis is available here.
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