Investment Horizons

Investment Horizons 5 – Towards a brighter horizon

From small caps to the shortcomings of correlation, what unifies all the articles is our aim to help investors along the path to investment success. In travelling that road, it is vital for investors to have an understanding of the broad market environment in which they operate.

31.05.2016

We hope the latest edition of Investment Horizons gives a flavour of the breadth of our research at Schroders. From small caps to the shortcomings of correlation, what unifies all the articles is our aim to help investors along the path to investment success.

In travelling that road, it is vital for investors to have an understanding of the broad market environment in which they operate. Our first piece therefore looks at the food and beverage sector. We have used our in-house expertise to think laterally, noting the troubling similarities between the health issues faced by the food and drink market and those that tobacco companies have had to deal with over the past 25 years.

In investment, the particular is almost as important as the general. Our second piece highlights a number of often quite idiosyncratic reasons why smaller companies remain worthy of investors’ attention. A contrarian call, perhaps, but often it is the brave who win the day.

We should never forget that investment is simply a means to an end. And one of the most important ends is saving for a pension. The emphasis has often been on raising contributions, but we believe that this is unrealistic beyond a certain level. Instead, we have turned to long-term investment history, concluding that generating reasonably consistent returns during the savings phase is likely to be a more fruitful and realistic aim if pension promises are to be met.

In our last two pieces we discuss two measures crucial to the functioning of markets. The measurement of inflation is vital both to investors and to a much wider population beyond. We have analysed the economic literature and concluded that it is highly likely that inflation has been overstated by official measures for many years, at least in the US. This could have serious ramifications, not only for gauging the true level of economic output, but also for pension providers, who may be over-providing benefits.

Correlation is another concept that is much used and, we would argue, abused. Part of the problem is a misunderstanding of its limitations. We have therefore looked at how correlation works, what we should expect of it and – more importantly – what we shouldn’t.

As ever, we hope that one or more of our articles spark your interest. If so, we hope they will stimulate you enough to get in touch so that we can discuss our ideas with you in person.

Yours sincerely,

Gavin Ralston,
Head of Thought Leadership