The Dangers of Investing Using the Rear-view Mirror

The turning point

Then came a speech from Fed chair Jerome Powell, and almost instantly, the investing landscape started to change. In his words it was – “time to retire the word transitory.” He had finally acknowledged the ever-higher inflation prints and the need to raise interest rates. Other Fed speakers joined in with the usual carefully coordinated and choreographed speeches and very quickly there was a palpable increased sense of urgency, as the macroeconomists for many countries underestimated each successive inflation print and input price level. Even Christine Lagarde at the ECB had to rip up her December script on interest rates rises and the new era had dawned. The last strategy you have needed to employ since the first week of December 2021, is one based on performance pre 08/12/2021. Stocks, funds and even whole fund houses found themselves in a new paradigm since.

As previously mentioned, genuine inflection points in markets occur relatively infrequently, but when they do, the use of the rear-view mirror can lead investors to making some extremely poor decisions. The stocks and funds that are now currently outperforming, are the very same value and income ones that have recently been criticised and highlighted as serial poor performers. We would highlight funds such as the JPM US Equity Income fund and Fidelity Global Dividend funds as being the kind of funds that are full of relatively attractive value stocks, and which should continue to benefit in the economic environment we expect to be sustained for the foreseeable future. In fact, the JPM fund which topped said poor performance table is currently a non-too shabby 5^th percentile in the IA North America sector over 1 year to 24/02/2022.

At the same time there is much talk about the US being generally overvalued, but a quick glance at some of the value funds shows they never got to the eye -watering levels of some of their growth peers. We would highlight M&G North American Value as a case in point.

Moving forwards

Many of the previous darlings of the investment world, which looked so good in the backward-looking performance tables, and were hoovering up assets like never before, have now come under severe and constant performance pressure. From the client feedback our advisers are receiving, it seems that they are also concerned that markets have gone through an inflection point. It is at times like this, we believe, it is not only important to be aware that times have changed but also communication to clients of what is happening will be more important than ever.

For the last few years, it has often been relatively easy for clients to use stock momentum to make significant gains in global markets and often without the aid of an adviser. It seems that in this new investment world, which is post ‘transitory’, the coming months and years will provide a significant opportunity for advisers to demonstrate the value of their advice. Nothing is ever certain in investing, but it feels like the era of rear-view mirror investing is perhaps over and that a more considered approach which takes old fashioned values, like profit and a good business model, will come back to the fore and a genuine diversification of assets will be rewarded.