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Fighting the bull

Equities

The environment has seemingly never been better for investors. After an incredible collapse in 2020 sharemarkets have staged a remarkable comeback, with the likes of the Nasdaq Composite Index near-doubling from their lowest 2020 levels.

  • Buoyed by monetary policy, excess savings and in many cases, investors stuck at home with little else to do but invest, almost every asset class has delivered outstanding returns. Anyone who invested during this period, whether professional fund managers or individual investors, likely feels like a genius.

    It was easy to make money. Consider that the average balanced fund seeks to generate a return of 7 per cent ,but managed to deliver in excess of 15 per cent. Risk was rewarded, at least over a short period of time. This is particularly evident in the growth sectors of the market, be it small-cap and microcaps that seemingly jump by hundreds of percentage points in a week, or big-name tech stocks still dominating indices.

    As is normally the case in bull markets, there has been a flood of commentators and experts entering the conversation, some for the first time. This ranges from social media influencers, to ‘stock gurus’ who have decided to manage money for the first time. And why not? Times are great.

    Yet this environment provides a unique challenge to the financial advisory sector, which has been there, prudently managing diversified portfolio for its clients and most importantly, guiding them through the unique psychological challenges that arose during the pandemic. Sticking to a proven and consistent strategy has paid-off, but in many cases not as much as chasing returns could have.

    As financial advisers, we are facing more and more questions about the booming returns in cryptocurrency, or the ‘one that got away’ in the form of a high-conviction, global or microcap strategy that topped the tables in the previous year. Advisers are confronted with an increasingly short-term and opportunities market, highlighted by the boom in IPOs, SPACS, mergers and acquisitions and new fund issuance.

    The ease of starting an equity fund and attracting investors is likely a positive in the long-term for the market, offering greater choice and more competition, however, it increases the complexity of the adviser’s role. Those managing a single pool of capital, with limited if any connection to the end investor, can approach investment very differently than someone with an ongoing advice relationship.

    There is no doubt that advisers are feeling the pull to embrace many of the highest-performing strategies, it is only natural to react to what clients are asking for, and it is difficult to ignore past performance. This conundrum highlights the real value of financial advice in the digital and information age.

    This may be seen as a conflict, but it is in advisers’ best interest to act in their client’s best interest. Advisers are in the business of providing ongoing financial adviser and investment support. The pandemic offered the best possible realisation of this, with many people making catastrophic decisions simply because they didn’t have access to advice. Investment advice during crises cannot be transactional; one needs to know their client to understand how they will react.

    The majority of advisers are not in the business of providing transaction opportunities but rather support and guidance when their circumstances change. This is delivered by being there all the time, in the background. Advisers can’t do this if they simply follow the most popular trends or investments which rarely live up to their hype. One of the most common reasons for leaving an adviser is investment performance, much of which is driven by the external managers they select, rather than their own decision-making.

    Advisers must make prudent recommendations that suit the objectives of their clients and understand their risk profile. They can’t throw their philosophy out the window when a new opportunity comes up. We know that chasing momentum and hype doesn’t work, and ultimately leads to underperformance, putting the reputation and relationships of the adviser at risk.

    It is for this reason that issues like internal governance, funds under management, profitability and transparency are key to the due diligence process that advisers must undertake on any investments they recommend; something that becomes more difficult in a bull market. 

    As the bull market continues to extend, advisers are faced with this unique conundrum, in which they are forced to navigate the fast-evolving nature of markets, while ensuring they continue to do what’s best for the long-term interests of their clients.




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