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Gergel: I’m not going to start predicting the macro – it doesn’t work

11 September 2017

The manager of the Merchants Trust explains why he prefers to manage risk by investing in a range of different stocks rather than attempt to forecast “binary” macroeconomic outcomes

By Jonathan Jones,

Reporter, FE Trustnet

Investors would be better off diversifying their portfolios but staying fully invested than attempting to predict macroeconomics, according to the Merchant Trust’s Simon Gergel.

Making a call on the big picture has been frustrating for investors over recent years, with many consensus views suggesting that areas such as the US equity market and government bonds are too expensive and must at some point be in line for a correction.

Yet this has not been the case as over the last five years the S&P 500 has gained 125.74 per cent –ahead of the broader global MSCI All Country World index – while the Bloomberg Barclays Global Aggregate index is up 28.43 over the period.

Performance of indices over 5yrs

 

Source: FE Analytics

“For me predicting macroeconomics doesn’t work,” Gergel, the manager of the £688m investment company, said.

“There are a lot of very clever people trying to predict economics and markets and I have not seen many people that are very good at it.

“If I had been predicting macroeconomics I would probably have held too much cash for the last five years because I would have been too nervous and I have seen hundreds of people make that mistake.”

The manager said it is much better for investors in the trust if he looks to continue to pick outperforming stocks rather than focusing on macroeconomics.

“If an individual investor feels nervous and wants to hold cash I wouldn’t put them off that – that is their call – but I remain fully invested,” Gergel said.

“And over the long term I think that is the right thing to do and in terms of the income generation it is quite important for investors.

“We have ridden through a couple of nasty cycles that have emerged over the last 15 to 20 years, particularly the early 2000s and again in the financial crisis, and each time the directors have remained fully invested and it has been the right thing to do not to build up too much cash.



“If you built up a load of cash in March 2008 you would have given up massive returns in the following months.”

To help limit the downside during these events, last week the manager outlined the rationale behind moving from a FTSE 100 benchmark to the FTSE All Share to better reflect his positioning towards a more all-cap approach – a move borne out of a wish for further diversification.

“If you have got 45 stocks a few of those are going to go wrong – maybe even a third go wrong – but it still gives you a good chance to outperform overall and within the portfolio we have shares that will work in different circumstances,” he said.

“But if you have one decision – cash or no cash – calling that is difficult. Maybe you have 60 per cent visibility but that is not great odds.

“What I can do is identify companies that are trading below their long-term intrinsic value but that I think have sustainable franchises and if we buy them today on a five-to-10-year view it should make good money.”

This approach should benefit investors if there is to be a market correction in the next couple of years – something many commentators expect.

Indeed, it is anticipated that the UK market should go through a correction at some stage as it has not had one for a while.

Mark Dampier, research director at Hargreaves Lansdown, noted: “A correction of 10-20 per cent is normal at some stage. What is abnormal is that we haven’t seen one for a couple of years. There is a difference between that and a really big bear market in excess of 50 per cent. You have to divorce the two.

Performance of index over 5yrs

 

Source: FE Analytics

“If you are expecting a big bear market that can really crush your capital then that’s one thing but if there is a 10-20 per cent correction we have those all the time – they are not that unusual and most of the time they’re buying opportunities and not anything else.”

Gergel agreed, noting that there is a “good chance of some sort of correction in the market” over the next three-to-four years.



“It is a very difficult economic cycle to call because although it has been quite long it has also been very muted. Equally we have very low unemployment in this country but no sign of wage growth – so there are all sorts of odd things going on,” he said.

“Probably there will be a downturn at some point but could that come from a higher level than we are at today? Yes it could.

“It could happen from here or it could happen from 20 per cent higher up and you could just end up back where you are today.”

If the manager had a strong view on whether the market were due a correction in the near term, he would adjust the portfolio accordingly, but this is not the case currently.

“If we had foresight and we saw it coming there are things that we could do to protect against it but the problem with these things is it is really hard to call. Normally you only know you are in a recession when you are coming out of the end of it,” he said.

As it stands, the manager said he is not doing much today to prepare for a significant downturn in the economy or the market because he is unconvinced that there will be one in the short term.

However, if he were to become more concerned about the economy or market he would look to take some risk out of the portfolio in either some of the financial stocks or through very expensive consumer staples – depending on the reasons for the market fall.

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