Bull markets do not need a recession to crash and burn, warns Artemis Fund Managers’ Simon Edelsten, who says investors who are waiting for a deterioration in economic data before they de-risk could be blindsided by a severe correction
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Edelsten, who runs the Artemis Global Select fund and Mid Wynd International Investment Trust, pointed out every market cycle has a different way of ending, it is not just about “inverted yield curves and debt”.
The manager recently cut his exposure to the FAANG – Facebook, Apple, Amazon, Netflix and Alphabet (Google) – stocks on valuation grounds, but said many investors continue to hold on to them as they are “terrified of selling”. This reminded him of the turn of the century, when a market crash caused a recession, rather than the other way around.
“I was in the middle of my career and I was thoroughly up to my ears in the TMT [technology, media and telecoms] bubble,” he explained. “And some of the attitude out there, of people being frightened of selling things, came from the fact that people had given up trying to value them.
“If you don’t know how to value something, you just think, ‘oh, I’ll sit here with a neutral position in this stock’. I don’t think that’s what the public are paying for when they hire active managers, my belief is the public are paying for us to do valuation work and to sell shares when they’re expensive.”
The manager continues to keep an eye on the FAANGs, warning these stocks may not represent the one-way bet that many investors think.
He said that Donald Trump will continue “having a go at Facebook and Google” and while Amazon has so far avoided too much criticism from the US president, “the midwest shopkeepers being put out of business are going to be complaining about it at some point”.
While Edelsten hasn’t ruled out buying back into these stocks again if their valuations become more compelling, he said the point is he is not just a buy-and-hold investor.
He admires many of the managers that do use this tactic, such as Nick Train and Terry Smith, but said he is always looking to get new shares into the portfolio that represent better value for money and this often involves selling his winners. Edelsten believes this represents a far more prudent strategy at this point in the cycle.
“The nature of a bull market is that if you do buy and hold, you’ll end up with very lumpy holdings in stocks when they are quite expensive,” the manager continued.
“And then if markets get really turbulent, your biggest holdings might be your most vulnerable holdings and your fund then might turn out to be much riskier from an investment point of view, not in terms of the quality of the companies, just unbalanced portfolio management.
“I find it very puzzling that people think that buy and hold forever is in some way virtuous. I think it’s risky. And that’s why we trim our holdings.”
The focus on risk is one of the characteristics that sets Mid Wynd apart from its peers. Edelsten doesn’t mind falling behind the market in a straight bull run, adding that the time for an all-out aggressive strategy in the current cycle has been and gone. Instead, he said his trust tends to prove its worth when the market wobbles – and the more corrections there are, the better it does.
Performance of manager vs peers since start of data
Source: FE Analytics
“We catch up on the bends and that was my experience in the 2000s by the way, when global equities did almost nothing,” the manager added.
“Running a much more capital protective fund in this style, and a more spread fund, meant that we were keeping up with or slightly beating the bull market, but we were really outperforming the fools when the market crashed.
“And that ratchet effect led to us having absolutely the market-leading total return in the end. It is not just a sort of cautious mindset, it is how I found the best total returns come in most markets, the last 10 years being pretty unusual in being all one way.”
Data from FE Analytics shows Mid Wynd has made 129.52 per cent since the current management team joined in May 2014 compared with 94.84 per cent from the IT Global sector and 92.1 per cent from the MSCI World index.
Performance of fund vs sector and index under current management
Source: FE Analytics
The trust is trading at a premium of 2.46 per cent to net asset value (NAV) compared with 1.79 and 1.43 per cent from its one- and three-year averages.
It has ongoing charges of 0.65 per cent. It is not currently geared.