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The only word we might change in our immediate post-Brexit analysis

Three years and three months on from penning our immediate reaction to the Brexit referendum result, would we change a single word? Well, maybe just the one …

09/09/2019

Kevin Murphy

Kevin Murphy

Fund Manager, Equity Value

“We do not have any preconceived notions as to what we will do now the UK has voted to exit the European Union.”

So we stated in Throw out the playbook, here on The Value Perspective, the day after the country’s historic referendum and, given all that has happened – and indeed all that has not happened – over the intervening three years and three months, we feel suitably vindicated in our stance.

Still, let’s not cherry-pick individual sentences.

How does that entire article – which set out to explain how investors who follow a value strategy strive to remain as objective as possible, even in the face of the biggest economic and political shocks – hold up?

The way value investing works, we arguably should not want or need to change very much at all but is that the case? On 24 June, we wrote …

The Federal Reserve is now famously ‘data-dependant’ when deciding whether to raise or lower US interest rates. And while – for reasons discussed in articles such as Gross misconduct – we do not share the US central bank’s confidence in the accuracy of preliminary estimates of economic data, the desire to react to the situation as it presents itself, rather than having a pre-planned strategy, is a prudent one.

We do not have any preconceived notions as to what we will do now the UK has voted to exit the European Union. There will undoubtedly be much wailing and gnashing of teeth from businesses up and down the country. And the stockmarket will inevitably react – indeed it did as soon as markets opened after the vote – moving share prices up and down, depending on its estimates of the ‘winners’ and ‘losers’ from the situation.

The true fair value of businesses changes very slowly over time, however. There may be a prolonged economic downturn or there may not – no-one can say with any certainty. Of course, that will not stop economic pundits guessing although, if they were honest, they could not say they knew. Either way, for most businesses with a 50-year life span, the next six months or so will have a relatively insignificant impact on that true fair value.

It is therefore incumbent on us to do what we always do, here on The Value Perspective. That is, to take advantage of emotional swings in the market that are not justified by the swings in the true value of companies – in other words, to be buying when others are scared and to be selling when others are greedy. We do not have a playbook we simply follow by rote – indeed, the only thing we are ‘dependant’ upon is valuation.

If, say, financials fall more than is justified – thereby becoming significantly cheaper and as a consequence significantly less risky – we are likely to be adding to our positions. If they do not fall significantly, we will not be. And if the more stable stocks we own in our portfolios rally significantly due to fear over the coming months, we are likely to be reducing our positions. If they do not rally significantly, we will not be.

We do not know where share prices will settle – not today and not over the coming months. No one does. We will, however, act as we always do. Going wherever the value is in the market. Buying things others find uncomfortable. Often buying things others currently believe to be tainted in some way. Then as those negative perceptions and short-term issues alleviate, share prices rebound. Investors who have followed our strategies over time have been compensated for short-term discomfort through considerable long-term excess returns.

In truth, this is a different strategy to most other fund managers. We see very few competitors who follow this type of strategy – and that is good news. Those long-term excess returns our value strategies have delivered also serve to diversify our investors’ portfolios and so reduce their risk. The next few months may be difficult and they may be volatile. It is our job, however, to take advantage of that volatility and exploit the emotional reactions of the market by remaining, as we have always been, valuation-dependant.

Looking to remain as objective as possible, given we are judging our own work, we would argue that piece has stood the test of time pretty well – in fact, blessed with the huge advantage of 20/20 hindsight, perhaps the only change we would like to have made back in June 2016 was, in a couple of places, to use the word ‘years’ instead of ‘months’ when considering the future.

But of course, as we never tire of saying, here on The Value Perspective, the future is uncertain and therefore impossible to forecast on a consistent basis.

That is why we do not try, preferring to follow a process for which there is now approaching a century and a half of historical data to show buying good businesses for less than their intrinsic value will, on average and over time, yield above-average returns.

Author

Kevin Murphy

Kevin Murphy

Fund Manager, Equity Value

I joined Schroders in 2000 as an equity analyst with a focus on construction and building materials.  In 2006, Nick Kirrage and I took over management of a fund that seeks to identify and exploit deeply out of favour investment opportunities. In 2010, Nick and I also took over management of the team's flagship UK value fund seeking to offer income and capital growth.

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