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Richard Peirson: lessons I've learnt in the last 20 years
by Dylan Lobo on Mar 17, 2014 at 11:30
AXA IM's A-rated Richard Peirson is a rare breed who can boast a 20-year track-record on a consistently outperforming fund. Here he reveals five lessons he's learned on this epic run and three big changes in markets.
This month Citywire A-rated Richard Peirson celebrates 20 years of managing the AXA Framlington Managed Balanced fund, recording top quartile performance over 1, 3, 5, 10 and 20 years as demonstrated in the graph above.
So what are the secrets behind this success? Peirson highlights five important lessons he has learnt in the last two decades, and three major differences in markets between then and now.
1. Trust your instincts
Peirson's first lesson shows just how important it is to go with your gut.
‘We recognised in early 2000 that Technology, Media and Telecom (TMT) shares were dramatically overvalued and sold most of our TMT stocks, re-investing in what I term the ‘dull and boring’ companies, such as pharmaceuticals and banks. In 2000 we saw the UK portfolio’s strongest relative return of the past 20 years, as the Tech Bubble burst.'
2. Learn from your mistakes
However, when you get it wrong it's important to realise why.
‘Risk aversion in the wake of the Long Term Capital Management (LTCM), Asian and Russian crises led to smaller companies underperforming large ones considerably during 1997 and 1998. Despite good absolute returns, the fund’s relative performance suffered given our substantial overweight in smaller companies and 1997 marks the only year in the Fund’s 20-year history in which it underperformed the sector average.
'I recall it being a difficult period for me personally, however, it significantly impacted my subsequent management of the fund: henceforth I have restricted my underweight in large companies to 20%.
'It wasn’t until 2008, which saw the worst of the credit crunch and global recession, that smaller companies did badly again. My UK portfolio return was then close to its sector average, but it could have been so much worse without these restrictions in place!'
3. Maintain your insurance policy for a rainy day
Peirson has also learnt the value of having a safety net in place.
‘Equity markets falling on the back of 9/11 proved a difficult period for our equity style. However, our ‘insurance’ 20% allocation to cash and bonds meant that although returns were poor in absolute terms, we managed to marginally outperform the peer group.'
4. Stick to your long-term positioning, but choose wisely
Keeping faith in your convictions (assuming they're right) over the long term is also essential to Peirson.
'The 2008 credit crisis became progressively more difficult for businesses and we reflected this by concentrating on more defensive companies, without significantly reducing our equity weight.
'The visibility in early 2009 was worse than at any time I can remember, yet when we felt the worst was over by March, we started to increase the risk profile by buying more good value UK cyclical companies, such as resources, as well as a few medium-sized businesses.'
5. Pick your battles
Finally, Peirson has learnt the art of being flexible, while remaining true to his fundamental process.
‘Since the 2008 credit crisis there have been a few bumps along the way, such as the conflict in the Middle East and the turmoil over the US debt ceiling. In such times we remain focused on the long-term. It seemed inconceivable to us, for example, that the US would ever allow its bonds to default. Investors need to differentiate between a crisis and noise.
'Managing other people’s money can be incredibly rewarding, but in times of market turbulence also daunting, as it is a huge responsibility. In times such as these you need to be able to adapt to any changes that occur, but remain true to your fundamental investment process.'
Three key differences
Peirson goes on to highlight the major differences between investing now and 20 years ago.
Firstly Peirson points out how investors now need to be far more aware of what's happening overseas.
'Geographical weights mean much less now than in the 1990s. Successful companies have become more global. Companies listed in the FTSE All-Share index generate approximately 70% of their sales overseas.'
2. Information overload
Secondly, Peirson highlights how much information investors now have at their disposal.
'There is much more data available on economies, industries and companies, and the dissemination of information is almost instantaneous. Despite this, I believe that markets remain inefficient.'
3. Technological change
Peirson concludes by underlining how traditional business models have been hit by technological advances.
'Technological change is now so rapid that traditional business models can no longer be relied upon. The investment winners of 2020 may not even exist today.'