Diversification, remaining invested throughout the cycle and not attempting to time the market are some of the main lessons Standard Life Wealth’s Jason Day and Eric Louw have learned over their investment careers. 
With more than 25 years’ experience between them, the managers of the model portfolio service, which FE Trustnet overviewed last week, have a number of lessons they have learnt over the years.
The most important lesson for Louw (pictured), who runs the Standard Life Wealth Target Return models, is to stay invested – something that has grown more significant in the current bull market.
“I think in terms of lessons the impact of quantitative easing (QE) is hard to overstate. It has been huge – particularly for asset prices,” he said.
Indeed, the decision to use QE by central banks, as well as lowering interest rates to historic lows, has had a profound effect on markets. Bond yields have fallen to record lows while stock markets around the world continue to grind to new highs.
Performance of indices over 10yrs
Source: FE Analytics
As the above chart shows, the Bloomberg Barclays Global Aggregates index – which measures the price of bonds globally – has risen 106.9 per cent over the last decade while the MSCI World index has gained 149.87 per cent on a total return basis.
As such, investors looking to time the market have consistently been proven wrong, with many believing the value trade would outperform this year as the end of quantitative easing measures and the start of interest rate hike cycles should begin to dampen growth.
However, value strategies have struggled as bond yields have remained low on the back of political uncertainty, while defensive names and quality growth stocks have continued to perform well.
“Market timing is incredibly difficult. I think valuation does matter but value funds have had a tough time over the last few years. Styles drift in and out of favour but a blended approach is really important,” Louw said.
With market timing difficult in the current climate, he said staying invested has been a key lesson to learn, with some high profile examples of managers predicting a correction too early a reminder of this.
Indeed, he points to FE Alpha Manager Crispin Odey as an example of the fact that even the top managers sometimes incorrectly time the market.
“Given the difficulty of market timing staying invested is really important. We have to work out that our clients are paying us to manage money [not sit on cash].”
Jason Day (pictured), manager of the Standard Life Wealth Conventional model range, said another key point is diversification – something that is also particularly pertinent in the era of QE. 
Indeed, the central bank monetary stimulus has caused the valuation of multiple asset classes to rise, not just equities, yet some managers have missed out on good returns by failing to diversify.
“Gilts are a case in point. The amount of times I have seen people decry gilts and then they turn out to be the best performing asset class,” Day said.
Performance of index over 10yrs
Source: FE Analytics
Indeed, as the above chart shows, over the last decade the FTSE Actuaries UK Conventional Gilt 10 Years index has returned 118.29 per cent to investors.
“The year that Bill Gross said that ‘gilts were resting on a bed of nitro-glycerine: expect capital losses’, it was the best performing asset class for UK investors against emerging markets, Asia etcetera,” he added.
On the equity side, many investors are now wary of the valuations of some of the defensive names, but Day said that no one really knows when this run could end.
“We can make fairly logical assumptions about synchronised growth and we are seeing corporate profits coming through but there are still air pockets along the way,” the manager added.
He pointed to the political risk in the eurozone as an example of something that could have – in theory – dampened markets, but since the election victory of Emanuel Macron the market has become more stable.
Even with risks surrounding the Italian referendum next year and the Catalonia crisis hanging over Spain – not to mention Brexit negotiations – the market has carried on its merry way, up 16.94 per cent year-to-date.
Performance of index over YTD
Source: FE Analytics
But if conditions were to escalate in any of the potential situations mentioned above, the manager said that gilts, despite their high valuations, may still be worth holding.
“You just don’t know. We can all make well informed logical decisions using the best brains in the business but I think having a widely-spread portfolio of different asset classes does provide you with relative safety.”
Even if the team are underweight an asset class, he said that it also worth having a number of back-up funds and managers for all eventualities.
“One thing I have definitely learnt is to always have a very good reserve list of funds because most of what we do is using active managers,” he said.
“You get managers moving to other houses so you need to have a really good back up or at least something that you think looks interesting and have made sure it is tradeable so you can move quickly.”
He said the final lesson for managers and investors is to constantly challenge investments, processes and their own way of thinking.
“We are a small but really collegiate team. Every week we are challenging each other’s fund selection, assumptions and we are always looking to optimise what we do,” Day said.
“We even challenge other fund selectors and managers. We meet economists and strategists at other fund houses and they often have a different view of the world or regional view.
“We take that and we challenge our team in Edinburgh. We are not complacent and are always challenging.”