e-fundresearch.com: What are your personal lessons learned from 2014 market developments?
Eric Robbe: The biggest lesson to take away from 2014 is a familiar one. Don’t try to time market tops and bottoms. That strategy cannot work in the long term because no one has a crystal ball. Pick an asset allocation that’s right for you in the long term and stick with it during all market conditions. Most of equities markets ended up in positive territories despite sharp downward movements in October and December 2014.
To illustrate the point, roll back to the beginning of 2014 when New Year’s predictions were being made for the economy and capital markets. Central to most of these predictions were the anticipated actions of the Federal Reserve. In late 2013, the Fed announced that it was going to phase out its purchases of Treasury and mortgage-backed bonds in the coming year. The bond-purchase program had been originally undertaken to stimulate the sluggish post-2008 economy by injecting more liquidity into the system.
Hinweis: Eric Robbe (Laffitte Capital Management) ist Speaker beim
ARC Outlook 2015 am 21. Jänner in Wien
Many prognosticators believed that the Fed’s decision to reduce, and ultimately end, quantitative easing in 2014 was tantamount to party crashing, economically speaking. Interest rates would rise in 2014, bringing down a long bull market in bonds and stocks. Others anticipated a resurgence of inflation as a result of all the money the Fed had pumped into the system. This, in turn, would increase the prices of commodities and inflation-protected bonds.
All were reasonable predictions for 2014, based on macroeconomic theories of supply and demand. For example, it is very interesting to read oil specialists predictions in January 2014. Absolutely none of them predicted the WTI or Brent prices around 50$ a barrel at the end of the year.
So the first lesson is: even if you trust into the consensus, don’t take things at their face value.
And second lesson: in a such volatile markets, key words are always discipline, risk management, diversification and finally…humility.
e-fundresearch.com: With regards to the new year 2015: How optimistic is your view into the future and what obstacles and challenges should investors be prepared to overcome in 2015?
Eric Robbe: I think it is important for investors to create their own overall asset-allocation policy based mostly on their ability to tolerate risk—risk being the potential that the market value might decrease and continue to be decreased for several years. Then, as we enter a new year, investors can try to assess how to weight the broad asset classes within the context of the current macro and micro environments.
My own macro view is that interest rates are likely to continue to be low throughout 2015 and the Fed’s tapering may trigger more volatility on US equity markets especially. Due to this environment, an area of opportunity may be in some of the “alternative” sectors, like REITs, commercial real estate, private equity, etc.
I just want to draw investors’ attention, an environment of low rates and volatility, if it persists for a long period, may contribute to a rapid buildup of leveraged positions and credit risk, that could lead to an higher risk framework.
The “bottom line” to all of this is to maintain a broadly diversified portfolio, because no one can consistently time investment markets. Know your risk tolerance, stay broadly diversified and you will both sleep well and see your investments increase over time.
As forecasts for 2015 are published, think about how much you want to base your financial decisions on expectations of what might happen. Many people will make confident-sounding forecasts about 2015 and many of these prognosticators will be wrong. As humans, our natural tendency is to be drawn to what sounds confident. Confidence and accuracy, however, are two different things.
If you accept the uncertainty of not knowing what will happen, you will make better decisions. Those who ignored the forecasts and stuck to a long-term allocation strategy likely did better this year than those who adjusted their allocations based on what they thought would happen. A similar difference in portfolio outcomes is likely to occur in 2015 and beyond.
So according to what happened in 2014, the lesson for 2015 should be the same from that we learned in 2014. Don’t try to time markets. Pick an asset allocation that’s right for you and stick with it through thick and thin.
This is a long-only approach, personally I am more comfortable with absolute returns strategies, most of the time uncorrelated with financials markets.
e-fundresearch.com: Why should investors consider an increase in allocation to your asset class in 2015?
Eric Robbe: Paradoxically, It is a quiet easy question to answer. All ingredients are gathered for a new m&A cycle. Companies with abundant safety cash may give this cash back to shareholders (dividend, share buy-backs), or choose external growth and get both a new process and additional market share. On the other hand, you see companies which have trouble to rebound, so they will have increase their capital or liquidate holdings or accept an acquisition offer. Financing conditions at historical low rates and historical multiples (debt/ebitda…), new buyers (Asian), more confidence from CEO’s will stimulate external growth deals. So there is a clear improvement of the universe of potential deals which allows to take position on strategic industrial mergers that present a very good risk/reward ratio.
Due to the lack of yield on cash and bonds markets and to an increasing volatility on equities markets, a thematic that should be very attractive in 2015 : Futures dividends. The market of this new asset class, easily understandable witnessed a skyrocketing growth in the past few years. Knowing that dividends are a significant component of equity returns on a long term basis, main of them are structurally discounted and uncorrelated, investors should really have an in depth view of this new asset class for 2015.
