Luck plays a role in investing says Marlborough’s MacDonald – but process is what really matters

April 7, 2025

Although markets aren’t exactly favouring many investors right now, in more traditional market conditions, fortune often plays its part in investing. In his latest insight for IFA Magazine, Sheldon MacDonald(pictured), CIO of Marlborough, reminds us why it’s having robust process and discipline that really determine long-term success – especially when markets go off-script.

Luck, love, and luggage

My wife and I met the old-fashioned way: by pure luck. We got chatting after we both found ourselves temporarily stranded at Frankfurt Airport more than 30 years ago – and the rest, as they say, is history.

Looking back today, I’m still astonished by how many stars needed to align in order for us to somehow hook up. The geographic dimensions alone were pretty head-spinning.

I’m from South Africa. My wife is from Slovakia. We first set eyes on each other in Germany. We were both heading for the US, where we hit it off in earnest and celebrated by spending six weeks delivering cars all over the country – as you do.

More broadly, the whirl of circumstances which threw us together included global politics, national economics, exam obligations, visa issues, mislaid documentation and even lost luggage. The world sure moves in mysterious ways sometimes.

The happiest accident

Lest my other half should read this – not least with our 30th wedding anniversary on the horizon – I ought to stress that it turned out to be happiest twist of fate in my life. It was full-blown serendipity.

Serendipity in the markets

I recall these events here because it’s possible to experience something similar in the investment arena. Every now and then, whether we deserve it or not, we just get lucky.

It could be argued that this shouldn’t happen in an era of hyperconnectivity, big data and in-depth analysis. But the fact is that we still have to make decisions based on imperfect information.

As a result, there are occasions when the performance of a stock or a fund massively exceeds expectations. The triggers are usually entirely unforeseen and beyond our control. It’s like Frankfurt Airport all over again.

Don’t let luck lull you

As fund managers, how should we react in such instances? Patting ourselves on the back and resting on our laurels may seem justified, but it’s far more sensible to recognise how fortunate we’ve been and work hard – or perhaps even harder than before – to avoid surrendering all those out-of-the-blue gains.

When fortune frowns

Equally, there might be times when providence treats us rather less kindly. Thanks to an adverse succession of “sliding doors” moments no one could have predicted, a stock or a fund could conspicuously underperform.

Many investors might be more familiar with this scenario, especially in light of recent and ongoing market uncertainty. Here, too, the response from fund managers should be to keep working hard – or harder still.

Process over providence

Crucially, though, sheer graft has to go hand in hand with something else. Above all, whatever curveballs might be tossed our way, we need to acknowledge the supreme significance of process.

It’s process that can maximise the impacts of good fortune and minimise the impacts of bad fortune. Importantly, it can also help make the most of the more routine eventualities that lurk between those two extremes.

Avoiding the mirage effect

The essential trick with any process is to establish what’s effective and what isn’t. Serendipity and adversity alike can cloud this picture by fooling us into believing we’re either visionaries or bunglers.

Resisting the temptation to rip up the rulebook is often the toughest challenge in both cases. Spectacular peaks or troughs have to be seen for what they are: anomalies. In other words, sensational short-term developments need to be placed in a long-term context.

A case in point: European special situations

By way of illustration, take the Marlborough European Special Situations Fund. This is a highly rated, award-winning strategy whose performance of late – by its own lofty standards – has been comparatively subdued.

Various factors have contributed. The lingering consequences of the COVID-19 pandemic, high interest rates, inflation, anaemic growth across the European Union, a weak euro and a widespread preference for US mega-cap stocks have all weighed in.

On the one hand, these dynamics have been less than conducive to the cause of European smaller companies, which account for the vast majority of the fund’s holdings. On the other, the underlying stock-picking process has produced a lengthy track record of success over time.

Stay the course or rethink the map?

The team begins with an investment universe of around 5,000 businesses. Having distilled this array into a focus list of around 170, it then uses extensive research and direct engagement to identify high-quality companies with excellent management, solid operating models, attractive valuations and scope for growth.

Should this proven approach be ditched in the face of an uncommonly rough patch? Might it merely be tweaked? Or could we find it’s still capable of serving investors very well once a relatively extraordinary period has played out?

A turning tide for European markets?

The consensus now appears to be that European markets are on the cusp of – or even already enjoying – a meaningful renaissance. Many commentators are also suggesting small-caps in particular could be poised to benefit. This underscores the merits of not being derailed by potentially confounding episodes that lie largely outside our own sphere of influence.

Practise, patience, and perspective

Regardless of what kismet might have in store for us, there’s much to be said for knuckling down and continuing to do what we do best. As Gary Player famously remarked in explaining his prowess at golf: “The more I practise, the luckier I get.”

In investment, as in married life, staying on track demands plenty of time, discipline and effort. It requires constant scrutiny, consideration and reappraisal. But in the final reckoning – and I sincerely hope Mrs MacDonald agrees with me on this point – the rewards should make it all worthwhile.