Want to wind up Dominic Hawker and Mark Sturdy? Ask them about Elliott waves. The two principals of the small Wiltshire-based investment house Marlborough & City, and self-described chartists, roll their eyes at the mention of a theory that, more than any other, has both popularised and discredited the search for pattern and meaning within statistical market analysis.
‘The last refuge of a scoundrel,’ says Hawker (on left below) drily. ‘It had brilliant marketing and the ability to craft a very compelling narrative but [at its early 1990s’ peak] it was just getting ridiculous.
‘People were talking about [the market] being in a fifth wave of a fifth wave that went all the way back to the Middle Ages, and “proving” it through tree rings.’
Popularised by former Merrill Lynch analyst Robert Prechter, the leading equity market guru of the 1980s, the Elliott wave principle claimed investment markets moved in consistently repeated cyclical patterns, evident over periods of up to several decades.
Famous for tipping the equity bull of the 1980s, at a time when gold was the world’s favourite asset class and stocks were universally unloved, Prechter’s star waned when he continued to call 3,600 on the Dow Jones going into the crash of 1987. In the event, it topped out at 2,722.
His reputation was further tarnished with a call for between 100 and 400 on the Dow just as the world was entering the 1990s’ bull market – one of the best periods to be invested in stocks in history. A quick online search reveals a still-thriving Elliott wave cottage industry, however.
Both Hawker and Sturdy are keen to emphasise the differences between the trend and pricing momentum analysis they practise and the more esoteric corners of the discipline, but admit high profile fads have made admissions of technical analysis problematic for many investors.
‘A lot of fund managers are closet chartists,’ says Sturdy. ‘Trends are important. No one will admit to managing a fund technically but there are obvious similarities [between what we do] and anyone who manages on a pure value basis.’
The company was founded 18 months ago under Raymond James authorisation by Hawker and Sturdy, alongside in-house financial planner and partner Patrick Moore. It remains fairly small, with just £5 million under management on behalf of 40 clients, a significant number of whom are friends, family and acquaintances.
That is split with roughly one-third in direct equity income-focused bespoke and two-thirds in ETF-based model portfolios – an area where the company identifies the greatest growth potential in IFA outsourcing, which the company is just beginning to bring to the market.
Neither manager has had any previous experience with private clients, following careers largely spent in investment consultancy, research and brokerage. Both men spotted an opportunity to break new ground after the RDR, meeting each other as they trained for the CISI’s PCIAM examination.
While they have much in common they also admit to creative differences. ‘We do talk and we do argue,’ says Hawker. ‘We hold each other to account and we won’t do something until we have both agreed to it.
‘Technical analysis is a subjective matter and we both have 20 years’ experience of looking at trends. The strength is in putting those two subjective views together.’
While forging a new working relationship mid-career will always present challenges, there are equally complementary aspects to their approaches, adds Hawker. Both look for pricing and relative strength trends, and evidence of peaks and troughs in valuation, but they do so in different places.
‘If we are talking about the FTSE, I will be looking at the FTSE 100 while Mark will be looking at the constituent stocks. My background is much more in top-down management.’ These skills are combined in factors such as straightforward market breadth and volume analyses.
Sturdy and Hawker take an active role in the management of both sets of portfolios but those complimentary skill-sets give Hawker a lead role on the more internationalised, macro asset allocation of the model portfolio. Sturdy is better suited to the stock-specific value and yield characteristics of the bespoke.
Due to different inception dates, the bespoke portfolios have little commonality, which makes performance hard to generalise. The model performance has been strong, albeit over a still short lifespan, with the Balanced fund returning 6.21% between May 2013 and early April versus the FTSE WMA Stock Market Income return of 3.3%. Since October 2012, the Cautious fund has returned 14.86% versus the FTSE WMA Stock Market Conservative Index return of 7.81%.
The models have been out of emerging markets for most of the past year but both managers say they are following with interest early signs of what they interpret as price base-building, pointing out that the headline index valuation recently appears to have found a floor.
‘Most interesting has been the fact that this formation has happened at what appears to be a long-term floor [in relative valuation versus the MSCI World] and seems to have begun to outperform,’ says Hawker.
‘But we would want to combine this with a series of factors to confirm [before we would commit].
‘The US remains in the most persistent uptrend globally in terms of mid cap outperforming mega cap. For the FTSE 100, that has been the recent topic of conversation, with the FTSE 250 sharply pulling back from its recent high. It has rallied again from its support level, suggesting the uptrend is still intact, but we have yet to see confirmation.
‘Some of the most cyclical sectors that have seen the strongest outperformance over the last year, such as housebuilders, have had a sharp pullback and have since traded in sideways ranges, so we are still waiting to see if this develops into a return to the uptrend.’
Overall, the company believes developed markets will continue to climb a wall of worry but Sturdy points out that trend analysis works best during periods of momentum. During periods with no obvious catalysts, such as now, the company is willing to run a prudent cash buffer, currently 10%.
‘We are overweight cash and Europe but we are prepared to wait for a breakout, [even though] we have been impressed by how the Eurostoxx 50 has bounced back from the lows.
‘It never pays to be the first person into a trend. We wait for the right time, which is when there is a catalyst that will make it attractive.’
Within the bespoke portfolios, however, the breakdown of a strong run for mid caps has offered an interesting opportunity to reallocate to a new set of relative outperformers in the senior index, he adds.
‘Building services remains unloved, media stocks have had a good run, as have tech stocks and travel companies, if you look at the hot sectors where people have been taking profits.
‘I think GlaxoSmithKline is quite an opportunity at the bottom of its relative price range and Royal Dutch Shell has started to outperform. With the signs of rollover on the FTSE 250 we are now focusing on larger stocks. Bloomsbury Publishing offers a great dividend and great cashflow, although I would have bought it just on the yield, whereas it has now come into around 3% from 5%.’
Pub groups and miners have also been recent buys, he adds. ‘We are edging back into the mining sector following earnings revisions. Aberdeen Asset Management also has a good dividend and looks relatively cheap. It has derated on emerging market sentiment and now looks interesting.’