‘We think markets are relatively efficient and we don’t try to second guess what they will do’ is practically a mantra for Simon Midgen.
But the chair of the investment committee at St Albans-based Consilia Wealth Management thinks markets can be irrational. ‘Gilts have returned almost as much as equities over the past three years, which is mad,’ he said.
It is little wonder, then, he expressed surprise at the negative implied rates on gilts when ‘taking into account forecast inflation’. He pointed out ‘huge demand’ from pension funds had driven gilt prices up, observing: ‘There’s been a massive run on gilts on the back of quantitative easing.’
He also notes equities remain ‘exceptionally strong’, despite big global events such as Brexit, the US presidency of Donald Trump and concerns over North Korea. ‘But whether that’s a surprise depends on your point of view,’ he said. ‘For us it’s not surprising: markets incorporate information from all sources.’
Despite his aversion to second-guessing the markets, Midgen does take a view on the time to maturity of fixed interest investments. ‘At some point, interest rates will go up and quantitative easing will end, but we don’t know when that will be,’ he said.
‘So it makes sense to be exposed to more short-term movements, where the risk is less,’ he continued. ‘We have reduced duration in the fixed income parts of our portfolios.’
In line with his opening mantra, Midgen generally avoids active funds. ‘Why is one person any better at second-guessing stock prices than another? They are not,’ he said.
Consequently, Consilia prefers using low-cost passive and smart beta funds, including Dimensional funds. ‘Many people think if you pay high fees to advisers and investment managers, then you get high returns. Our view is the less you pay in fees, the more you get in returns.’
Consilia controls portfolio turnover, ‘to control costs and give more returns to clients’. It combines its own analysis with that of FE Analytics when making asset allocation decisions.
Decisions are made collectively by the investment committee, which comprises the senior partners of the firm and meets at least quarterly. ‘As we are passive and long term in outlook, we don’t usually need to meet more frequently,’ said Midgen.