Excuses, excuses – Assessing the performance challenge

Most fund managers went into the pandemic holding the wrong companies. As the spread of the virus and the resultant economic carnage became increasingly apparent, many dashed to cash and other safe haven investments. Unfortunately, this only meant that the stock market recovery was missed. The results have not been great, the average fund within the global equity sector underperformed the market. Malcolm Schembri, manager of the Garraway Global Equity Fund, takes stock.


Rather than go back to the drawing board and critically assess what went wrong, many sought to take the easier route and pass on the blame. “The Fed is propping up market” bandwagon was a rather timely and conceivable explanation. Yet if this was the case why are European markets still deeply troubled, despite similar quantitative measures in Europe? Other managers have been more creative and absurdly suggested that droves of retail investors or speculators, buying up fractional shares have been pushing the US stock markets higher. This is hard to swallow considering the very modest percentage of total daily volumes these market participants cumulatively account for.

What we think we know is all wrong!

Many are flabbergasted as to how the stock market could recover so quickly despite the clear economic distress. We are perplexed as to how and why so many investors have been expecting the market to follow the economy despite 90 years of empirical data which clearly shows that there is no meaningful relationship between the two.

Whilst central bank intervention can help market sentiment in the short run, it is a misconception that central bank intervention has any material effect on the stock market performance over any meaningful length of time. According to data from the not insignificant economist, Robert Shiller, the S&P500 delivered an annualised gain of 13.3% over the last decade. Despite the supposedly Fed induced rally, 10.2% of that 13.3% return is corporate earnings growth and a further 2.3% is attributable to dividends. The multiple expansion accounted for only 0.8% of the return. Decades of empirical evidence further support these findings. Growth in earnings, cashflows and dividends are the primary drivers of returns over time.

Furthermore, for those who are thinking that monetary policy has been behind the growth in earnings this is not the case either and no, the growth in earnings per share have not really been fuelled by buybacks as is commonly perceived. In the US earnings company earnings have grown 9.4% per annum just under the 10.2% earnings per share growth. Hence why despite similar accommodative measures in Europe, because of poor earnings growth, the stock markets have performed poorly.

Market Timing – really bad for your wealth

The high cash levels during the market recovery severed as yet another painful reminder that it is impossible and dangerous to one’s wealth to time the market. A long-term study by financial services market research company, DALBAR showed over 30 years investors made 3.69% per annum compared to the S&P 500 11.11% return over the same time frame. In other words, for the average investor a £10,000 investment grew to £29,655 compared to the S&P500 near eightfold return of £235,827. That is correct, over thirty years, market timing has cost the average investor just over 87% of what they would have had they just tracked the market.

The legendary investor Peter Lynch delivered returns of 29.2% per annum over his 13-year tenure running the Magellen fund. All the investor needed to do to achieve the 29.2% annualised return was buy the fund and hold it, or as Peter Lynch put it: “Don’t try to time your investments, buy them on a regular schedule month after month.” Whilst many did buy the fund, due to market timing, the average investor actually lost money in the fund.

Peter Lynch also put it thus: “Have conviction in the long run and ignore doomsday predictions about the world coming to an end.” This seems fitting for today’s market.

What we have done

We try to practice what we preach and so the Fund remained fully invested at all points in time. That’s not to say we did not take opportunities, for example we invested in Intuitive Surgical, maker of robotic surgical products and Illumina, genetic sequencing systems developer and manufacturer, when these names got indiscriminately sold off. This approach, focussing on quality and conservative balance sheets, has served us well and has led us to outperform the average fund within our peer group by over 14% year to end of May 2020 (GBP B Class).

Looking ahead, it is a waste of time to try and anticipate where the markets will be within the next few months. Over the medium to long term however we do have incredible opportunities which the market seems to be not pricing in due to its short-term focus and distractions. We are well positioned to benefit from the unprecedented change going on due to the digital revolution, technological and medical advancements. Over time, it has not been profitable to bet against human ingenuity. We think that that especially applies to the companies we own and the people who run them. Particularly when as a weighted average the companies held are compounding free cash flow growth in excess of 15% per annum.

At the time of writing, remaining on the sidelines might seem the intuitive thing to do. Peter Lynch suggests not - “Far more money has been lost by investors preparing for corrections, or trying to anticipate corrections, than has been lost in corrections themselves.”

A version of this article appeared in Investment Week on 10 July 2020.