27 December 2018
In recent years I have penned a year-end holiday wish list. Occasionally, those wishes have materialised in the following 12 months. Often they have not. Either way, making wishes is an expression of hope. That is a worthy endeavour as one year draws to a close and we look forward to the next.
This season I have three wishes spanning finance, interdependence and diversity.
My first wish for 2019 is that investors, asset managers, journalists and financial pundits will all set aside the tired debate of ‘active versus passive’ and recognise that when it comes to the most important investment decision, we are all active.
Specifically, of all matters in finance perhaps the most well established is that the strategic asset allocation (SAA) decision determines 90% of subsequent investment returns. Once the SAA is determined, whether the portfolio is actively managed or not, whether it is populated by ETFs, index futures or active managers is generally of second order importance.
As 2018 draws to an end, the volatility and sharp setbacks of its final quarter have damaged returns across virtually all portfolios. That is probably a harbinger of things to come, in my view. A ‘post-peak’ world of growth and earnings deceleration, accompanied by a myriad of political and policy risks, is a recipe for choppy markets, if not worse.
Accordingly, investors and their asset management colleagues will have to spend more time in 2019 considering the nexus of return, volatility and correlation - the core ingredients of portfolio construction. I believe getting that mix right, and then budgeting properly for beta and alpha, will be essential to looking back this time next year at performance that has achieved or surpassed its target.
The second wish is for citizens everywhere to recognise the benefits of interdependence. Trade, migration, the exchange of information and ideas, as well as common husbandry of the planet, are public goods. Yet today in many countries they are viewed with suspicion, even hostility.
It cannot be emphasised enough: trade is mutually beneficial. It raises total output, employment and wealth. By lowering prices, it increases purchasing power. We believe mercantilism and protectionism are economic nonsense. I believe one should view bilateral trade deficits akin to the deficit most of us run with the grocer or petrol filling station - an unalloyed benefit of specialisation. Or do we really prefer autarky (economic self-sufficiency) and impoverishment?
Multilateral deficits may imply that a country is living beyond its means. Or, perhaps, it is investing for a brighter future. But in neither case do I believe tariffs are the answer to external deficits.
I also believe migration and the free movement of capital and information are similarly beneficial to the common good. Sensible policies to guide movements of people and investment are, to put it simply, sensible. They enhance welfare by increasing living standards, and not just as measured in monetary terms. Mobility of people and ideas leads to cultural and scientific advancement. Walls, in contrast, are the stuff of economic, cultural and scientific impoverishment.
Interdependence also extends to managing the planet for ourselves and those that follow.
So this year’s second wish is for recognition that strength is found in embracing the benefits of interdependence and engagement, not the retreat to isolation.
The third wish extends engagement to understanding that diversity is a source of strength and success. The pursuit of diverse communities and organisations is not about sub-groups, quotas or preferential treatment. Each of us, irrespective of gender, ethnicity, religious affiliation, sexual orientation or any other characterisation is a unique and hence diverse individual. Recognition of that basic fact maps to the fostering of communities, workplaces and organisational settings that welcome all, particularly those unlike us, because doing so leads to more productive, welfare-enhancing outcomes. If we can have open minds about the merits of new ideas and new technologies, surely our minds can be opened just as much to absorb diverse perspectives.
In human endeavours the whole is potentially greater than the sum of the parts. Yet for that to be realised, I believe the parts must bring unique skills and talents and the group must forge them together in ways that makes greatest use of each contribution. Embracing diversity lies at the heart of one of those few occasions where two plus two equals something more than four.
So that is it for 2019: a short wish list comprised of first principles of finance, economics and humanism.
Best wishes for the year ahead.
The information in this document is given for information purposes only and does not qualify as investment advice. Opinions and assessments contained in this document may change and reflect the point of view of GAM in the current economic environment. No liability shall be accepted for the accuracy and completeness of the information. Past performance is no indicator for the current or future development. Allocations and holdings are subject to change.