Reasons to be Cheerful

A new year is coming and if you are not (or your adviser isn’t) already doing so routinely, it’s time to reappraise both the relevance and the positioning of your personal investment strategy and make changes as required.

2014 was a bumpy year for global financial markets but most investors with a properly structured investment strategy should have enjoyed a modest profit. Although, as the often repeated mantra states ‘past performance is not a guide to future returns’ it is my view that 2015 is likely to follow a similar pattern; a bumpy ride with a modestly positive outcome.

Appraisal is an important process, requiring rigour and honesty in equal measure. It is all too easy to deceive oneself about the success or otherwise of decisions made. So, contemplate the following questions:

What were you trying to achieve? What went well? What went less well? What have you learned from the process? What will you do differently next time?

For example, we have an ongoing process of self appraisal to help us learn from our decisions regarding the asset allocation guidance we give to our Wealth Management Service clients. I am pleased to report that the outcomes of individual decisions were predominantly positive in 2014, but not everything goes according to plan, particularly within an expected time frame.

Our clients have been well served by our decision to increase their allocations to US equity funds during the year. In fact, over the last 18 months we have increased our allocation by 38%. Our belief was that the US economy would accelerate and lead to higher corporate earnings, which in turn would justify higher US share prices, particularly at a time when US interest rates remained low. Furthermore, we expected that better than predicted US economic growth would accelerate the demise of quantitative easing by the US Federal Reserve and encourage the US dollar to strengthen, further improving returns for sterling based investors. We got this right on both counts and, so far, outcomes have been excellent, with some of our chosen funds generating returns of around 18% year to date.

We expected overall returns on bond investments such as gilts and sterling corporate bonds to be flat but in reality, fixed interest has proved the gift that keeps on giving; with an average return of around 7% year to date from sterling corporate bond funds.

We believe it is just a question of time and that so far, prices have surprised on the upside as a result of the spectre of deflation in the Eurozone and the increasing likelihood that the European Central Bank (ECB) will embark upon a program of fully blown quantitative easing. Although there might be more positive return to come from this sector over the short term, we believe that we are now relatively close to the turning point and it is too risky for all but the most nimble of investors to try to capture this.

Our prediction that UK commercial property would perform well in 2014 has also borne fruit for our clients. An increase in the scope of permitted development rights has enabled developers to convert commercial premises to residential without first obtaining permission from the local authority. Those of you that follow the news on our website will be aware that it is this very reason that resulted in our recent relocation to brand new offices in Esher…

There have been many commercial to residential conversions with the result that the supply of good quality office accommodation is greatly reduced, particularly in London and the South East. This has encouraged rents to rise, which in turn is allowing values to increase. Many such funds have managed double digit returns so far during 2014.

Looking back over 2014, we have plenty to be cheerful about. Our clients have generally enjoyed a good return on their investment portfolios and we have acquired a much nicer working environment.

Looking forward to 2015, there are plenty of reasons to remain cheerful. The UK economy is forecast to grow at 3% and the US economy will probably grow at around the same level, helping companies to generate further profits growth to at least support if not increase current share prices. The ECB might well print a pile of money to buy sovereign debt, which could diminish the fear of a deflationary spiral in the Eurozone. The Japanese printing presses continue to print new money and Chinese interest rates have recently reduced.

I was going to tell you about all the things that could go wrong in 2015 (there are plenty), but I will wait until the next edition so that you can focus, in the meantime, on enjoying your festivities with abandon. Tis the season to be jolly….