Now is a good time to think about the people and processes involved in your investment portfolios, according to Royal London Asset Management’s Trevor Greetham, as the market cycle moves into its final stages.
With an economic expansion that has lasted a decade, Greetham said it is time to ask: “If there is another recession, where can I look to get good process and good people who’ve managed funds during a recession?”
After 10 years since the ‘great recession’ officially ended in June 2009 and the economic recovery began, the US economy is approaching the longest business expansion in its history.
With economic cycles usually classified by four stages – ‘early cycle’, ‘mid-cycle’, ‘late cycle’ and ‘recession’ – many market watchers believe the long, drawn-out expansion has entered the late cycle.
“The 10-year anniversary tells you that you probably haven’t got another 10 years,” said Greetham, head of multi-asset at Royal London Asset Management. “You’re getting towards the end.”
According to the National Bureau of Economic Research (NBER), which sets official dates for US economic cycles, cycles have lasted on average about five and a half years since the 1950s.
However, there is a wide variation in the length of individual cycles in the world’s largest economy, ranging from as short as 18 months during the peak-to-peak cycle in 1981-1982 to as long as 10 years between 1991 and 2001.
US GDP over 10yrs
Source: Federal Reserve Economic Data
What happens in the US economy is a leading indicator for other economies, as they tend to follow suit.
With the US expansion now at a late stage, Greetham believes it is a good time for investors to review how resilient their portfolio is should the cycle come to an end.
Broadly speaking, the fundamentals of the US economy remain rather strong, said the multi-asset specialist, but there are some causes for concern.
“The thing that makes me think we may well have a recession is the unemployment rate, which has fallen from 10 per cent – the highest since the 1930s, during the Great Depression – a decade ago to the less than 4 per cent it is today, the lowest in 45 years,” he noted.
“So, it’s getting to a point now where the US economy is almost at full capacity. Inflation is rising, interest rates have been going up and it feels like we’re bumping near the top, near to a recession.” 
Greetham, who oversees the Royal London Global Multi Asset Portfolio range, said the anniversary of the expansion has another significance for the fund industry, where people are obsessed with track records.
“If a fund manager has a 10-year track record, people are very impressed,” he said. “But today a 10-year track record is not long enough to have been a fund manager during a recession.”
Greetham (pictured) explained that it has been 10 years since the last recession, meaning a fund manager with a 10-year track record has only managed funds in good times.
“Recessions are brutal,” he said, noting that all corners of the market drop and volatility increases.
How many fund managers have managed funds for more than a decade?
“I don’t know what the percentage is for the entire industry,” Greetham replied. “I reckon maybe less than one in 10 managers have managed funds for over 10 years.”
Yet, he acknowledged that the last decade has not all been a time of milk and honey.
“We had some choppy times,” the fund manager explained. “The years 2010-2012 were a bit tricky. 2015 was also a bit tricky at times. So, there have been some bursts of volatility, but nothing like you get during a recession.”
Greetham said there are three things investors can do to avoid being wrong-footed by what’s to come.
The first thing, he said, is for investors to take a look at where they’re invested and ask: ‘How would this behave in a recession? Will I be able to sell it? Will I be able to get my money out?’
“Because whatever happens in a recession, funds’ gates close, or you can sell but you can only sell at very low price because nobody wants to buy,” he cautioned.
The portfolio manager said the sort of things he’d be particularly nervous about including more exotic, very high-yield investments.
“Things like aircraft leasing, peer-to-peer lending, or anything with a lot of leverage in,” he said.
These things do really well during the good times, the Royal London multi-asset head noted, “then suddenly, you can’t sell them anymore and you’ve lost half of your money”.
“We’ve started to see some example of that,” he said, citing the case of Funding Circle, a peer-to-peer lending marketplace that allows investors to lend money directly to small and medium-sized businesses.
The company’s share prices collapsed after early success that led to an initial public offering (IPO) on the London Stock Exchange.
At first hailed as the next big thing in the wake of the financial crisis, the peer-to-peer lending model appears to attract a lot less favourable attention lately.
“So, you get these things that look great until they don’t look great,” Greetham said.
When the market is in a more positive mood, he said, it’s a good opportunity to get rid of some of those assets.
The second thing investors should do, according to Greetham, is to look for funds with an active strategy that can cope with recessions.
“Active tactical asset allocation,” he explained, “so you can move away from equity markets and towards government bonds, for example, using an approach like the ‘investment clock’.”
The investment clock, developed by Greetham, is a portfolio management theory based on the idea that different asset classes will outperform one another depending on economic conditions, or the economic cycle.
The theory is a guide to asset allocation in a portfolio and intuitively relates asset rotation to the economic cycle in a graphical representation of a clock, hence the name investment clock.
Source: Royal London Asset Management
Ideally, Greetham said, the investor will find a process with a track record including recession.
The third thing an investor can do, in some circumstances, is to find a way to control volatility. “Because when volatility is high, you can get bigger losses,” he said.
While Greetham has not forecast an imminent recession, noting that the US could yet grow for “another few years”, he said that it is something that investors should be preparing for.
“Maybe America will not have a recession for another 10 years, I don’t know,” he concluded. “There are all sorts of things that can make a cycle last longer. But it’s definitely that stage of the cycle when people should be thinking about it.”