Those investing for the very long term should avoid chopping & changing funds, stick with a proven investment style and tilt towards areas such as small-caps, according to one top-performing multi-manager.
Following the birth of FE Trustnet editor Gary Jackson’s first son, we have been taking a closer look at how to build portfolios for children. We have previously discussed the merits of Junior ISAs and Junior SIPPs as well as looking at the long-term fund picks.
In this article, we take a step back and speak to Simon Evan-Cook, a senior investment manager in Premier Asset Management’s fund of funds team, about the broad rules for long-term investing.
Performance of fund vs sector since launch
Source: FE Analytics
Evan-Cook works on Premier’s multi-asset range alongside David Hambidge, Ian Rees and David Thornton. Between launch on November 2012 and the end of October 2018, his £213.9m Premier Multi-Asset Global Growth fund generated a 93.75 per cent total return – which is the eighth highest in the IA Flexible Investment sector.
Don’t chop and change
When asked for tips for those investing for their new children until their adulthood, he said one thing to definitely avoid is switching too quickly between funds. The manager noted that many investors will buy a good fund for the right reasons, only to sell it after a short period of underperformance and buy something else.
“That’s the very worst thing you can do, and I think that is how a lot of people lose money,” he added.
“It’s not necessarily picking bad funds or investment styles. It’s picking them and abandoning them after a couple of years, then repeating that over and over again until the pot of money has been worn out. I’d recommend that people pick something that works then stick with it.”
Go with a winning style
On that point, Evan-Cook noted that there are plenty of investment styles that proponents claim will offer an edge over the long run, but all investors need to do is focus on the select few that have a demonstrable record of success.
“You definitely want to go with an investing style that has worked over the long term. For us, the two styles that all the statistics say do work is value – as in mean-reverting or recovery kinds of value – and quality-growth, which is more the Warren Buffett-type of investing,” the multi-manager said.
“Obviously, Warren Buffett is a very good example of how sticking to an investment style over a long time period can lead to a lot of success. Over the 18 years that you have with a Junior ISA, that is plenty of time for an investment style to work out; over 18 years, you’d do equally well in either style, even today isn’t exactly the best time to be buying them.”
As the chart below shows, the value style of investing has indeed lagged growth by a significant margin over the 10 years since the global financial crisis. However, a number of investors expect the style to bounce back and Evan-Cook is one of those that has been tilting his portfolio towards value recently.
Performance of value, growth and quality over 20yrs
Source: FE Analytics
Get some small-caps
Another source of potential long-term outperformance that shouldn’t been overlooked when building a portfolio is small-caps. Although many will automatically associate investing with the mega-caps that are household names – the likes of BP, GlaxoSmithKline and British American Tobacco – Evan-Cook pointed out that a much richer hunting ground often be found further down the market-cap spectrum.
“Investors shouldn’t assume they need to go into those large-cap names that they’re probably familiar with. When you look into the data, it shows how small-cap investing outperforms large-cap investing by a massive extent over the very long term,” he said.
“If you are planning on buying something and leaving it alone for 18 years, then a decent exposure to small-caps is a very good idea. Within that 18 years you will have two or three periods when it feels awful because small-caps are being sold off during a risk-off period but it should pay off in the end if you can remain patient.”
FE Analytics shows that the FTSE 100 index, for example, has made a total return of 160.49 per cent over the past 10 years. Investing in smaller companies would have led to a return almost twice as high as this; the FTSE Small Cap (ex ITs) index gained 311.39 per cent over the same period.
Consider everything in equities
Another point that parents investing for their children need to keep in mind is that such a long time horizon means they can build high-risk portfolios, especially in the early days.
Evan-Cook said that investors who are confident they will not panic during periods of volatility and will be able to keep themselves from tinkering could consider holding 100 per cent in equities, as this is where the growth is likely to be.
“If you are a little more sanguine in nature and are able to leave things to just play out for the next 18 years like they have over the past 18, then I think a sensibly run pure equity strategy would be an appropriate approach,” he said.
“But if you are the sort of person that is going to panic when there are bad headlines out there, then being in some kind of product that can give you some degree of protection and doesn’t expose you to the full force of an equity sell-off makes sense.”
Those who are more nervous or unwilling to ride out big market falls could consider adding bonds, absolute return strategies or diversifying assets such as commercial property to reduce the portfolio’s risk.
What to buy today?
Performance of equity indices over 10yrs
Source: FE Analytics
Considering where to invest for the long term if portfolios are being built today, Evan-Cook said that “anywhere but the US” seems like a good starting point. He pointed out that the US market is trading at a high valuation, which makes future returns more difficult to achieve.
“In terms of the valuations, the US gives you a much harder starting place; there are a lot of long-term valuation studies out there that suggest that over the next 10 years US equities will struggle to give you any kind of positive real return whatsoever,” the multi-manager concluded.
“But if you look at areas like the UK, Europe, Japan, Asia and emerging markets, they all seem fine: they look like they can make reasonable returns for you over long time periods. That said, you have to accept that if what we’ve seen over the past year or past 10 years carries on, that position might feel uncomfortable and could feel like you’re missing out on something happening over in the States.
“However, I think you’ll still make very reasonable returns from those other areas – especially if you have a good active manager who is working all the levers of style, market cap, etc to give you every single advantage they can.”