Investors should be wary of fund managers who try to time markets and instead focus on those who spend their time trying not to lose money, according to Pyrford International’s Tony Cousins.
Cousins, chief investment officer and chief executive of Pyrford International, said that some funds define risk by how different they are from an index or the peer group but this is wrong.
“Essentially, it’s all about generating real absolute rates of return because people have liabilities and they need to make money in order to meet those liabilities,” he said. “We think this is what all investment processes should be about but, unfortunately, it isn't.”
The fund manager added: “Big drawdowns are what makes it very difficult to compound adequate, positive real rates of return because you have to take so much more risk to get back to the trend line.”
Cousins, who manages the £2.7bn Pyrford Global Total Return fund, which aims to deliver equity-like returns with bond-like volatility, targets three goals: capital preservation, beating inflation and predictability of returns.
“Investment is all about process,” he said. “It's not about gurus or gut feel or a hunch or whatever: it’s about having what consultants refer to as ‘a repeatable process’ that you can demonstrate your portfolio remains consistent over time.”
The process for Pyrford Global Total Return has remained unchanged for around 30 years and has proven robust in different market conditions.
Annual performance of fund vs index since 2010
Source: FE Analytics
“We have got a track record in the strategy going back to April 1994 and over that period, as measured by the FTSE 100 index, there have been seven negative calendar years,” Cousins explained.
“We have been able to make positive rates of return in five of those seven years. The two exceptions were 2002, where we lost 2.1 per cent in a market that was down 22 per cent, and 2018, where we lost less than 1 per cent in a market that was down 9 per cent.”
The importance of sticking by the process is especially important during more volatile times in the market as was seen during the final quarter of 2018 and more recently.
“We don't use volatility as a technique because that's market timing,” he said. “Anybody that tells you they are successful at market timing, they're either not telling the truth or they have just been very lucky and people's luck runs out. You don't want to invest in a strategy founded on luck.”
Cousins said there are four key return drivers for Pyrford Global Total Return fund: asset allocation, duration management, active equity selection and currency.
Pyrford takes a top-down view on asset allocation based on five-year total return forecasts and positions the portfolio accordingly, using initial yield and capital/real earnings movement to make investment decisions.
More recently this has led to the trimming of its equity portfolio due to the lack of value in the market.
Cousins said that it expects equities to deliver a yield of 6 per cent – based on an initial yield and growth forecast – over a five-year period. However, there are very few markets where it can find stocks with such numbers.
“As a result, we have a very low equity weighting within the strategy,” the manager said. “Today it’s 30 per cent. This is the same equity weighting with which we went into the financial crisis where equities were equally very expensive but probably not even quite as expensive as the they are today.”
It again highlights the importance of the process, said Cousins, because emotions can drive investment decisions, which he said is very dangerous.
For example, the three best buying opportunities of the past 50 years have come in 1974, 1982 and 2009 when economic news “was universally bleak”.
“Emotionally, you wouldn't think ‘I must go and buy risk assets’ at that time, but it was precisely the right thing to do because valuations were extremely compelling,” he explained.
Performance of index since 2008
Source: FE Analytics
“We called all our clients up and said in the second half of 2008, we are going to buy equities for you from a very, very low level. And to a man and woman at the time, they said: ‘Are you mad? Are you crazy? The world is coming to an end.’
“But the world didn't come to an end, it just got very cheap and that is when you need to be very contrarian and process-focused.”
Its second driver of returns is managing duration, which in the post-crisis environment has become even more important as a combination of quantitative easing and low interest rates have pushed sovereign bonds towards negative yields.
“Today is a very different environment to 2008 because the $14.5trn that has been printed coupled with the actions of central banks in driving down the long end of the yield curve [means] real yields are very low relative to their history,” the manager said.
This reached a low point in 2016 when 50 per cent of ‘AA’ or above sovereign bonds were giving investors a negative yield.
“Now that, frankly, is utterly absurd. How any investor can make a positive real rate of return when they are accepting a negative nominal rate of return?” said Cousins.
Such a scenario is only plausible when there is rapid deflation and that is not the current economic backdrop nor on the horizon; as such the manager is running very short duration on the portfolio. This strategy will not make a lot of money, nor will it lose investors a lot of money, allowing them to keep their powder dry for when a better environment emerges.
Currency management, the third driver of returns, aims to protect investors from declines in their base currency through hedges using purchasing-power parity as an analytical tool to determine when currencies are under- or over-valued.
“Sterling is very cheap currency and undervalued currency on purchasing power parity, so if it returns to fair value, this will lead to negative currency returns because it will depreciate against those foreign currencies, where we will be exposed to,” he said.
And finally, stock selection is the final driver of return and is based on both country allocation and sector.
Currently the best opportunities can be found in Asia ex-Japan, where there are much more supportive demographics and the potential for faster growth given that many of the economies are starting from a lower base and earlier stage of development.
In addition, Cousins said while it favours stocks with a decent dividend yield it also looks for return on equity capital, due to the compounding effect.
“Compounding isn't very exciting,” he explained, “but it is highly effective, and will drive earnings and dividend growth in the long in the long term.”
Performance of fund vs sector & benchmark since launch
Source: FE Analytics
While the overarching strategy has been around since 1994, the Pyrford Global Total Return fund was launched in 2009. During this time it has returned 55.47 per cent against a 129.52 per cent return for the average IA Flexible Investment fund. It has an ongoing charges figure of 1.09 per cent.