For most fund managers 2022 has been a year to forget. Dismissing the pain of loss as quickly as possible is human nature. Regret is hard to live with and so we move on quickly, maybe just pausing long enough to weave some comforting narrative. But there are always learning opportunities - a dreadful year brings more than most. It’s worth reviewing the lessons of the last twelve months.
Surprises can be split into things the whole market now knows and personal experience that we as individuals can learn from. Personal discovery is arguably the most valuable for future improvement. But this takes honest appraisal, and some documenting of the lessons to build new practice and rules.
Market falls always bring out the permabears - perpetually gloomy pundits hide away in long bull markets but in a crisis re-emerge undaunted to warn of impending doom. Few manage money, so failure of their predictions is painless. And in bear markets it seems to be all the press wants to report. Indeed the recent low in Sterling coincided with a frenzy by the bears. Investors should learn that little of what is said by these so-called contrarians is any guide for investment strategy.
Markets as a whole now know that central banks are fallible. Behavioural economics recognises the tendency of smart people to use intelligence and anecdote to deflect criticism and defend poor decisions. Yet despite the poor forecasting record of the Bank of England, its forecasts of extended austerity are now reported as wisdom. The higher profile a forecasting institution has, the more likely it is to focus on saving face rather than analysing errors and learning.
Perhaps the biggest casualty this year is the 60:40 concept; belief that bonds are always the antidote to equity problems. Possibly the success of this model over 40 years merely reflects a long period of central bank success - the result just follows from what was an unreasonable and unsustainable strategy of intervention to stabilise markets and support economic growth. Faith in diversification to control portfolio risk has unravelled in 2022; as alternative assets correlated with equities, and were hit by higher interest rates and illiquidity. Infrastructure, real estate and private equity may not yet have been repriced sufficiently downwards, meaning that the full correlation with equities is still to assert. There is a case for regulatory change in risk classification on model portfolios, many of which failed to protect as predicted on drawdowns. The process by which Liability Driven Investment was thought a low risk solution for pension funds might be added into this post mortem.
Another casualty has been some of the UK-managed retail multi-asset funds, ranging from those claiming absolute returns and growth to others making calls on rotation, valuation or market timing. The outflows from the disappointing funds show that investors are reappraising these.
And the year taught us that governments faced with a conflict between long term strategy on sustainability versus short term tax needs, will tear-up almost all planning, and hike taxes on the businesses that are meant to provide solutions. It takes time for oil companies to relocate and for energy prices to reflect under-investment, so the jury is out on the impact of ‘windfall’ taxes. Political uncertainty and instability in policies is making the UK a less attractive business location, even before factoring-in unpredictability of taxes.
Fund managers should review their big calls this year and how they assess company updates. Company chief executives are just as good as investors at weaving narratives. Trying to position for rallies, such as the November move in equities, may be missing the bigger picture.
A key learning from this year might be to trade less in order to avoid being whip-sawed by market swings. And, pay more attention to genuine cashflows rather than adjusted earnings and stories. Critical appraisal of company updates is key and fund managers must retain objectivity even after such an emotional year. Painful as it is, the last few days of a challenging year might be usefully spent by investors in reflection and learning.
A version of this article was published in Citywire on 20.12.2022.