Why are people apparently giving up on a basic rule of investing?
For years, spreading your money across different assets has been a founding principle of investing and yet many investors now seem comfortable to cluster in just one area of the market
Investment would be so much easier if we all knew which assets were going to rise and fall in price and so could pile into the winners while avoiding the losers.
Life isn’t like that, of course, which is why investors are generally urged to ‘diversify’ – that is, to spread their portfolio across different asset classes and investments – so that, as the adage goes, they do not put all their eggs in one basket.
Nobel prize-winning economist Harry Markowitz called diversification “the only free lunch in finance” though others are less convinced.
“Put all your eggs in one basket and watch it very carefully” is often attributed to Warren Buffett – Andrew Carnegie was the originator of the line – but the Sage of Omaha did say: “Diversification is protection against ignorance. It makes little sense if you know what you are doing.”
For lesser mortals, however, investing in different assets on the basis that, even if some are falling in price, others may well be rising, is a pretty solid approach to investment – and is why you do not come across many professionals who invest only in their single most favourite stock.
It is also why a recent Financial Times headline – There’s still only one winner in the growth versus value fight – struck us as such a bold statement.
And, no, this really is not because, as value investors, we do not agree with the growth-oriented conclusion – well, not completely.
To be fair, the piece acknowledges there is a case for value investing and growth is a very crowded trade but notes, by the same token, “buying value at this juncture is a big contrarian call. You may be right, but like contrarians in the late 1990s, the risk is that you are early”.
“For all the buzz over value, the scales still favour momentum and sticking with growth through tech and healthcare,” the article adds – and later concludes: “Value will only truly brighten after the next recession.”
Well, OK – but we cannot help thinking, while value may have thrived after the dotcom bubble burst in early 2000, that may have been of scant comfort to all those who had ‘stuck with growth’ to the top of the market.
Regular visitors to The Value Perspective will be well aware of our views on forecasting the future – in short, it is impossible so do not try – and so attempting to time the market with this level of specificity seems fraught with danger.
Yet, as we have argued before in pieces such as Active underperformance, which contained the following chart, the great majority of investors’ money is betting on growth’s run to continue.
Source: Schroders, Morningstar Direct, report date: May 2018, 1based on Luxembourg domiciled European Equity large cap portfolios, using fund data available at 31 January 2018. Excludes funds with no style score and/or no AUM data available.
Surely you do have to be a diehard advocate of value investing to look at that chart and think it might be sensible to have a bit more exposure to the cheaper parts of the market and a bit less exposure to the assets that have already done spectacularly well and thus are likely to be spectacularly expensive.
It would be a shame if the wider market had convinced itself there really was no such thing as that last free lunch.
Fund Manager, Equity Value
I joined Schroders in 2015 as a member of the Value Investment team. Prior to joining Schroders I was responsible for the UK research process at Threadneedle. I began my investment career in 2001 at Dresdner Kleinwort as a Pan-European transport analyst.
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