As a new reporter starting at Trustnet on 1 April, the past six months have been less than straightforward.
Embarking on a new role during a pandemic has its challenges, but unlike many of my peers, I have been lucky enough to continue working throughout.
As a history graduate, I appreciated the chance to be reporting on such an interesting moment of financial and global importance: as the world ground to a halt, markets tumbled in what was the sharpest contraction in history.
I imagine that there was a young financial journalist somewhere starting a career the day after the collapse of Lehman Brothers in 2008, when many thought the world was ending.
This crisis has been far less bleak than that, discussions about possible shapes of recovery and impending recessions in the early months were soon forgotten when the market rebounded swiftly.
I’ve attempted to grasp the intricacies of markets and skills of investing since April and set the target of amassing everything I’ve learnt in order to start my own portfolio at the end of September.
Whether they’re right or wrong, below are the lessons I’ve learnt through interviews with fund managers and industry experts that will influence my own investments.
Growth vs value is not so black and white
My knowledge of growth and value investing was limited to an hour lecture on Warren Buffett during an economics module at university.
I soon realised that there were fervent and polarised views and that it wasn’t as simple as the lecturer would have had us believe.
Randall Dishmon of the Invesco Global Focus fund told me in June that he hated the growth and value labels. He said that when you boil it down to just two styles, it makes your view of the world quite cyclical.
That cyclical way of thinking isn’t suited to a world undergoing clear substantial change and he used the example of the fax machine to illustrate that.
In 1990, investors saw fax machine manufacturers as growth companies that were underperforming just because value stocks were outperforming. However, the advent of e-mail left fax machines structurally challenged and they never recovered.
With that in mind, just because a company is trading cheaply relative to its cash flow or assets, that doesn’t necessarily constitute value. Similarly, if a fast-growing company trades at an expensive valuation relative to its earnings, assets and cash flow that also doesn’t represent good value.
I realised that both investment styles are important, but also understood the importance of moderation and objectivity. This meant looking beyond the polarising views, understanding there is lots of grey in between and finding the funds which are right for my investment objectives.
Absolute return investing is currently not fit for purpose
This is not a ground-breaking revelation but bear with me.
The idea is great in theory, but in application it understandably struggles.
I wanted to understand more about them and sought to interview those behind some of more famous strategies: Aberdeen Standard Investments Global Absolute Return (GARS), Aviva Investors Multi Strategy Target Return (AIMS) and the Invesco Global Targeted Return fund.
Although these strategies were never going to rise as strongly as equity markets, when they didn’t protect their capital on the downside, investors rightly became disillusioned.
The need for a low volatility option is important but if they also don’t enjoy the market rebound then they might as well just be defensive plays.
It’s a sector that can probably find the right formula of flexibility in adapting to changing market conditions but is still far from doing that currently. Even if it has found that flexibility now, it will likely need five years of consistent returns to regain that confidence.
As it stands, it’s not a strategy I will include in my own portfolio.
I learnt that even simple ideas are complicated in practice, absolute return investing is complex even before you include the impact of external factors such as central bank interference, and that shows no sign of changing in the foreseeable future.
Bullish on Japan
I have a strong bias towards the UK market as, before coming to Trustnet, it’s all I’d really known.
However, speaking to managers with biases towards their own geographical regions showed that I needed to expand the horizons of my own portfolio.
One such country which suited my long-term goals is Japan.
The country has rock solid balance sheets and ever improving corporate governance, the next 10 years will be very interesting.
The success of the 2019 Rugby World Cup was an excellent showcase of Japan and its people. The postponement of the Tokyo Olympics this year was an unfortunate end to Shinzo Abe’s premiership, but still represents its increasing global view.
The new prime minister, Yoshihide Suga, will likely look to continue the economic policy of his predecessor and this should provide a strong foundation for continued growth opportunities among Japanese equities.
This level of political stability is a clear comparative advantage, representing a lack of volatility for investors.
Deflation and ageing demographics are of course still a concern.
However, when I spoke to AVI’s Joe Bauernfreund in July, he believed that Japan’s growth story remains about individual companies rather than its overall economy and Japan’s future is grounded in innovation, automation and intellectual property.
There is tremendous of amount of value in Japan with a significant number of good companies trading below price-to-book value.
I realised that’s there an abundance of opportunity out there, while also appreciating that a Europe manager will sell you Europe, much like a Japan manager will sell you Japan. But the latter is a landscape of undervalued companies with strong fundamentals and I’ll certainly be keeping an eye on it.
Not all about Geography: Why I’m investing in biotechnology
As a young investor, my attention is increasingly drawn toward the biotechnology sector, not only because of its importance in developing a vaccine for this pandemic, but for future ones too.
Alongside a balanced portfolio, I have a small section for future trends, such as cloud computing, AI and cyber security.
The commercialisation of a vaccine is unlikely to be profitable for biotech companies, but it will show how reliant we are on the healthcare and biotechnology industry.
Before the Covid-19 pandemic, consultancy Deloitte predicted that healthcare spending worldwide would increase at an average annual rate of 5 per cent between 2019 and 2023. This is up from 2.7 per cent between 2014 and 2018. It also believes worldwide prescription drug sales will grow even faster, at a rate of 7 per cent a year until 2024.
However, biotechnology is not limited to medicines, it covers crop production, agriculture, industrials, not to mention biofuels and biodegradable plastics. As we embark on a decade of sustainability, these areas will be increasingly drawn upon.
Biotechnology in healthcare also has important near-term defensive qualities and long-term growth prospects driven by innovation and societal secular demand.
That demand is being driven by the increasing purchasing power of emerging markets and innovative new developments from gene therapy to tele-medicine. Demand across most of the industry is also highly inelastic, which leaves it relatively isolated from larger economic trends.
It showed me that geography and asset classes are important, but themes can sometimes trump them both. The next decade will be far greener than the one before and biotechnology is primed to take advantage of that.
As I embark on my investment journey, I’d welcome any suggestions or anything you think I’ve missed.
Thank you, reader.