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Five years on from Lehmans: what's been the best investment since?
by Simon Evan-Cook on Oct 08, 2013 at 14:44
If you can face it, think back to five years ago – specifically the day before Lehman Brothers went bust. With the full luxury of hindsight (but without cheating online), answer the following question: for a UK buy-and-hold investor with a five-year investment horizon, which would have been the best IMA sector to have bought that day?
Maybe you’d think gilts: they have lagged equities since the market bottomed (which was almost six months later, at the start of March 2009), but the advantage gained in the preceding market carnage surely covers that? Or possibly you’d go for US equities, with their relative defensiveness in a crash combined with their recent strong run. Both would be wrong (28th and 6th out of 36 sectors respectively).
I suspect that if we took a straw poll, very few would be able to pluck the right answer out of thin air – even among hindsight-blessed financial professionals (ourselves included, we only know this because we looked it up). It turns out that the right sector to have bought and then held on that day was Japanese Smaller Companies: never a sector that springs readily to mind, let alone in the midst of a financial crisis.
The average fund in this sector has generated a return of 97.9% since that day. This is an especially impressive result given the following five years contained not only the Lehman bankruptcy, but also the country’s ongoing economic stagnation, the euro crisis, the Tohuku earthquake/tsunami/nuclear catastrophe, severe Thai floods that blew holes in Japanese supply chains and Tokyo’s prime ministerial merry-go-round that made the role of Premiership football manager look like a job for life.
Now imagine you relied solely on a top-down view to invest, driven by macroeconomic and political forecasts. Firstly, you would never have invested in a Japanese small cap fund in the midst of a financial crisis (we know this because we remember the clamour to buy Japanese small caps at the time, in so far as there wasn’t any. We also know that more funds have since closed in this sector than launched).
Secondly, you wouldn’t have been able to see half these events coming (who predicted the tsunami and following nuclear blackout?). And thirdly, even if you had been able to predict such events, it’s just as well you couldn’t, as it would only have decreased the chances of buying the best-performing asset class. By now you will have spotted the point we’re labouring: relying on forecasting macroeconomic and political events at best doesn’t work and at worst draws you into bad investments while repelling you from good ones.
So how, against all expectations, have Japanese smaller companies performed so well? It’s down to a number of factors. Firstly, currency helped, as while the yen has recently been weak, it’s still far stronger against sterling than it was in 2008. The currency’s safe-haven status helped all Japanese equities withstand the months after the Lehman bankruptcy for sterling investors (that sector is the only one to be in the top quartile for both the sell-off and the rebound). The starting valuation was also useful, as the hot money had been giving Japan a wide berth for macroeconomic reasons before the financial crisis kicked off.
But there is also another factor. A factor that chimes with our own philosophy: it is down to good active management.
Simon Evan-Cook is a senior investment manager in Premier's multi-asset team.
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by James Phillipps on Dec 09, 2013 at 07:52