ONSIDE / OPINION
to come, but I think this is balanced by positive forces, such
as the likelihood that inflation will remain low. In such an
environment, valuations can move higher.
Outside of the UK, we like Asia and Europe, though
for different reasons. Asia we like not so much because
markets in general are cheap – though they are certainly not
expensive – but because we think it is possible to identify
third party funds that will outperform strongly. Indeed,
Asian equities (excluding Japan) have returned less than US
equities over the last 20 or so years, despite the stronger
economic growth. So, the appeal of Asia is that markets are
inefficient more than anything. This contrasts with Europe
which we like because we think its economic recovery is less
advanced than those in the US or UK, and thus has further
to go. The unemployment rate in Europe has really only
recently started to fall, and has a long way to go before the
ECB gets worried about inflationary pressures.
In fixed income land, it is very hard to find good value. G7
government bonds are trading on low or negative yields, so
do not make good longer term investments. That said, we
have identified pockets of value within emerging markets,
which generally have much stronger economies now than
was the case back in the ‘90s.
Finally, I should say something about alternative investments;
this is an area in which we have a real edge and which will
26
only become more important in years to come. In short, an
alternative investment is really anything that isn’t a bond
or an equity. So, a good alternative investment is one that
offers something positive that these traditional asset classes
don’t. The main problem with bonds and equities is that
they don’t perform so well when inflation is high or rising,
so the best thing that an alternative asset class can offer is
a hedge against inflation. An example would be renewable
energy where government-mandated incentives are designed
to encourage investment in new capacity and thus the shift
away from fossil fuel-based electricity production. What
this means for investors is that returns tend to be stable
as well as inflation-linked. Indeed, one typical renewable
energy fund has performed better than the equity market
since launch in 2013, whilst also having lower volatility,
and is negatively correlated to the equity market. So, by
adding such investments to our funds we believe we are
substantially enhancing return-risk profiles. They should
also perform well if and when inflation starts to rise.
Ultimately, we are seeking to run well-diversified portfolios
and to protect capital by focussing on the valuation of
companies, funds, asset classes and markets. The risk that
we think matters, or should matter to investors is the risk
of permanent loss of capital, not short term volatility that
measures temporary losses – and gains – of capital. We
believe that the best way to limit this risk is through a strong
value-oriented approach to investing.