"Be fearful when others are greedy and greedy only when others are fearful.” So wrote the great American investor Warren Buffett in his 2004 annual shareholder letter to the investors of Berkshire Hathaway.
It is wonderfully colourful language – and while not suggesting that our clients should ever be greedy (it’s an unpleasant word), there is a lot to be said for the idea of being brave when all around are becoming fearful.
The decade since the financial crash provides a superb case in point. For whilst an undoubtedly tense time for investors, those who held their nerve and stayed invested in the market potentially benefited by not missing out on the 10 best single-day returns that the FTSE100 had to offer.
The brutal volatility investors experienced in the early days of the financial crisis of 2008 and 2009 provided nine of those 10 days – generating an incredible gain of 61.4% (source: Datastream) – which suggests that, although it was a broadly unpleasant period for equity investors, managers were able to do a significant amount of bargain hunting, chiming nicely with Mr Buffet’s assertion than one should be “greedy when others are fearful”.
Seizing the opportunity
Cazenove Capital’s philosophy of using actively managed segregated equities and managed funds, both for UK and overseas equity allocations, afforded our third-party managers an opportunity to pick up shares in quality businesses that were being sold, sometimes irrationally, by investors who were at the capitulation point.
Consequently, those client portfolios that remained invested throughout the financial crisis are now showing significant gains with our Balanced* and Growth* mandates posting 10-year net growth numbers. Over the past five years our Balanced* and Growth* portfolios have generated returns ahead of the ARC PCI Benchmarks. Importantly, this was achieved with less volatility than the benchmark, which as Cazenove Capital clients and advisers know, is one of our core raisons d’être.
Those who did not remain invested, some of whom liquidated significant tranches of their equity allocation into cash, often struggled to reinvest at an attractive level. They left it until 2011 or beyond to redeploy their equity allocation, missing the 10 best days of the last decade – as well as six of the 10 next best days, another 24.6% of growth on portfolios (source: Datastream).
Many chose to hold cash, which since March 2009 has generated only very small returns as interest rates were reduced to historic lows. In fact, cash lost value if one is to factor in inflationary value erosion. The result: the portfolios of the more fearful did not benefit from the fruitful early part of the eight-year rally in risk assets, precipitated by the recapitalisation of the banking system and central bank quantitative easing projects.
Clearly today we can see these numbers with the benefit of 20/20 hindsight; but the fundamental principle remains true that, typically, over the long term it is better to be invested in shares than not to be. As such, these numbers should persuade investors to think twice about trying to time their way in and out of equity indices.
*Source: Asset Risk Consultants PCI (ARC) www.assetrisk.com. The Cazenove Capital performance numbers are in sterling and net of all fees including our annual management charge, trading commissions and underlying fund fees – including any in-house fund fees. ARC figures are defined as the average return of portfolios submitted by all industry contributors within each risk category. Cazenove Capital figures are defined as the average return of portfolios submitted and classified by ARC in each risk category. It should be noted that historical performance previous to the merger is based on individual investment processes for Schroder & Co. Limited and Cazenove Capital Management Limited respectively.