Where should
I invest my £1m to achieve capital growth in 2018?
By Ben Scott, CO-FOUNDER, Affinity Private Wealth
Finding opportunities to invest hard-earned capital is a perennial challenge and one that keeps us on our toes. It certainly helps that we access global markets and therefore have a wider opportunity set. However, rather than being employed simply to make our clients wealthy, it is also important to keep them that way too. It is therefore equally critical to determine where not to invest. Money management should not just be about ‘picking winners’ – attention needs to be paid to ‘avoiding losers’ too.
In the years since March 2009, when most stock markets troughed following the Global Financial Crisis (GFC), investment into risky assets, such as company shares, has been both rewarding and straightforward. Simply buying and holding a broad spread of equities, through an index tracker, has worked just fine. So, why consider a different approach through 2018?
At Affinity Private Wealth, we believe there are two very compelling reasons.
Firstly, most index funds are weighted towards the biggest companies and therefore reward past success. Investing using this momentum approach may work for extended periods, but does assume that past winners will outperform indefinitely. When this changes, index trackers can be heavily exposed. In the years before the GFC, bank shares heavily featured in the UK’s FTSE100 index. Post crisis, this relative dominance caused outsized losses for those who were passively allocated to that index.
money“Warren Buffett, cites as his first rule “never lose ” (his second rule is “never forget the first rule.”
Secondly, owning a tracker fund means you are unable to respond to changing dynamics within and between countries, sectors and industries. Take a look at the retail sector, where Amazon’s growing dominance and general online trends are causing a seismic shift in the entire business landscape; forcing
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traditional players to either adapt or fail. Looking ahead, an evolution in global energy usage – away from coal and oil – has potential ramifications for the success of countries and corporations alike. Without active analysis investor capital may be unwittingly directed to unattractive opportunities.
Add into the mix a long period of very positive returns – many stock markets hit new highs through 2017 – and it can sometimes feel uncomfortable finding homes for new capital. This is often referred to as ‘climbing a wall of worry’. So how helpful is it to identify where not to invest? Is this the lazy option? Not necessarily.
One of the world’s most successful investors, Warren Buffett, cites as his first rule “never lose money” (his second rule is “never forget the first rule”!) Whilst this might sound glib, avoiding losing investments is just as important as finding the next big thing. We believe in active investment management for our clients – employing specialists in their fields to achieve the desired outcomes. In fact, in some cases, we allocate to strategies which make money from investments that fall in value, a process known as ‘shorting’. This is a highly active approach and diametrically opposite to popular tracker investing.
These ‘long/short’ investment strategies – blending a portfolio of likely winners and shorting potential losers – can be particularly attractive in circumstances when broad-based market performance is more pedestrian. 2018 may be characterised by a sideways trading market, whilst the real economy plays catch up with growth expectations already priced in. For us, having such funds in our armoury helps generate positive returns and protect our clients’ hard-earned capital, during periods of short term volatility.
In summary, if investing £1m to achieve capital growth in 2018, we suggest paying sufficient attention to potential pitfalls – not just the opportunities. Or to quote one of our most respected investment managers – Howard Marks – “If you avoid the losers, the winners will take care of themselves.”
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