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Neil Shillito - "Market timing is a fool's errand"

Fund Manager
3 April 2018

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Neil Shillito, manager of the Downing Diversified Global Managers Fund (DDGM), discusses why he believes successfully timing a market is not repeatable on a consistent basis, and explains why he adopts a value/growth pairing strategy to aim to manage portfolio risk.


Last year we witnessed growth across major markets, with the bullish momentum continuing into January 2018. However, there was a shock correction at the beginning of February and again in March, causing a slump in market sentiment. In the US, the Dow Jones plunged, triggering a massive sell-off in global markets.


To reduce losses in such a situation, investors may be tempted to sell their holdings in the hope of buying the shares back later at a lower price. They may believe they can make a quick profit by timing a volatile market, and indeed some may strike it lucky. However, sooner or later, they could have a rude awakening, when what they thought was clever market timing, results in having to sell low and buy high.


I believe one of the most powerful statements by any investor, and possibly one of the most often ignored is by John Bogle, founder of Vanguard, who said “I do not know of anybody who has done it successfully and consistently. I don't even know anybody who knows anybody who has done it successfully and consistently.” 


This could apply to every aspect of investment management - timing the direction of a market, predicting whether value or growth investment styles are set to change, or favouring particular geographic regions or sector allocation. Many managers may claim to have the ability to ‘call’ the market, but may have no evidence, and even if they do it could be due to luck as much as judgement and may not be repeatable on a consistent basis.


Precisely because the past has proved to be an unreliable indicator of the future, as fund managers, we actively shy away from trying to predict market cycles, preferring to focus on building a robust and repeatable investment process.


In its recent annual review, the managers of Conventum Lyrical, a US-based, value driven holding in DDGM, observed a back-and-forth battle between the value index and growth index, with the yearly performance of the two flipping each year since 2015.


I believe that trying to time the growth/value cycle is a fool’s errand, even in the very short term. And over the long term, it is almost impossible. One of the central pillars of our investment process is to ‘pair’ investment styles such as value and growth, and this approach aims to reduce the element of risk in the portfolio. An example of the Fund’s strategic asset allocation is the target 40% allocation to growth equities. These typically outperform in rising markets and underperform in falling markets, but by a lesser amount, with the aim of resulting in a net gain. Growth holdings are paired with a target 40% allocation to value holdings – which typically outperform in falling markets and underperform in rising markets, again by a lesser amount and again aiming to result in a net gain.


Fund managers can be fallible and not all our investment decisions will be correct. However, we seek to ignore the market noise and self-perpetuating myths and concentrate on common sense, which in itself, is sometimes not that common. 


This article is for information purposes, should not be regarded as investment or taxation advice and no reliance should be placed upon it. The personal opinions expressed are subject to change and should not be interpreted as advice or a recommendation Capital is at risk. The value of investments and any income derived from may go down as well as up and investors may not get back the full amount invested. Past performance is not a reliable indicator of future results. Downing does not offer investment or tax advice or make recommendations regarding investments. Downing is authorised and regulated by the Financial Conduct Authority (Firm Registration No. 545025). Registered in England No. OC341575. Registered Office: St Magnus House, 3 Lower Thames Street, London, EC3R 6HD.


Please note, the personal opinions expressed are subject to change and should not be interpreted as advice or a recommendation.


Lyrical Asset Management Annual Review, 2017: 2017 was a strong year for the overall US equity market, with the S&P 500 producing a total return of 21.8%.  The Russell 1000 Value index had a decent year, producing a total return of 13.7%, but significantly lagging the S&P 500.  We have observed this back-and-forth battle between growth and value over the last three years.  In 2015, the Russell 1000 Value index underperformed the Russell 1000 Growth index by 950bp, its 9th worst relative year in the 39-year history of those indices.  The value index rebounded in 2016 and outperformed the growth index by 1,030bp, its 10th best relative year.  In 2017, it flipped again, and the value index underperformed the growth index by 1,650bp, its 5th worst relative year.


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