Words by Nick Curtin, investment executive at Foord Asset Management
In the early twentieth century, Keynes pioneered the economic theory that advocated for government fiscal and monetary interventions to mitigate adversities thrown up by the normal business cycle. The theory made a dramatic resurgence after the Global Financial Crisis of 2008/9 (which was itself blamed, to a large extent, on the competing economic theory of monetarism). Massive Keynesian ‘free money’ stimulus measures were also employed in unprecedented quantities during the COVID-19 pandemic crisis.
Yet it now appears that this economic stimulus (unsurprisingly) is core to the market malaise currently playing out. First, exceedingly low interest rates and, more latterly, unprecedented levels of fiscal support culminated in severe distortions to global capital markets as we headed into 2022. We have talked much in these pages over the last two years about our growing concerns for the rising global risks, so I won’t belabour the point here. Suffice it to say that the macro-economic chickens are now coming home to roost.
The concept of precision is psychologically very comforting — our human minds are hardwired to find precision, even where none exists. There are of course certain endeavours in life where precision is not only essential but also completely possible, and increasingly so as mankind continues to develop the technologies with which to do them: they are typically found in the science and engineering realms. Precision was non-negotiable for NASA scientists trying to put a man on the moon in the 1960s, or Elon Musk’s Space-X geeks who created a rocket ship that can land itself on a square meter patch back on earth after delivering its payload to orbit.
Even a less ambitious activity like making the perfect souffle requires a precise combination of perfectly whipped egg whites, just the right oven temperature, and the exact baking time to come out just right. Or at least it should – for some reason it requires almost as much art as science – as lovers of the Great British Bake-off will already know.
But for systems as intricate and exceedingly complex as the global economy and its associated financial markets, the idea of precision becomes a fallacy – and trying to find it soon becomes a fool’s errand. In the world of investing, we are dealing with the future. Unlike the hard sciences, it is a future that is not confined to a predetermined set of physics and chemical elements whose behaviour under certain conditions we can know with certainty. We simply cannot predict, with full accuracy and without risk, market tops or troughs, or those of individual securities either.
But with investments, precision is quite simply not needed. It is precisely for this reason that Foord’s investment philosophy is focused not on point forecasts, but on getting the big calls right. We also diversify the investment positions in such a way that we can deliver a reasonable investment outcome even if our base case scenario does not eventuate. Mathematically, we don’t have to be always right — just more right than wrong, and as consistently as possible. Then, if we are patient, the mathematical wonder of compounding will work its magic.
The range of possible economic, political, environmental, or investment outcomes is ordinarily wider than our human minds can probably comprehend. The current elevated levels of risk and uncertainty make this range of possibilities even wider. We must therefore resist the temptation for precision even more than usual because the consequences of being precisely wrong are that much worse.
This is the thinking that informs our cautious fund positioning, which is neither fully invested in risk assets hoping for a rebound, nor fully in cash awaiting a market bottom. Rather, we have a balanced exposure to asset classes. We focus on specific investments where the range of possible outcomes is as narrow as possible, rather than trying to load the bases on the elusive all-out winner — this is not the time for taking that kind of risk (it hardly ever is).
We, therefore, have a meaningful investment in foreign assets with a preference for quality companies with pricing power. These investments are best placed to protect capital from persistent inflation in the coming years. But portfolio hedges and cautious stock selection are important to protect capital in the short term.
We also have a reasonable investment in South African companies that are attractively valued and supported by relatively defensive (predictable) earnings prospects. South African bonds also comprise a portion of the funds, but at moderate levels, given the country’s worrying fiscal and political risks. Listed property is constrained to a low weighting, given poor fundamentals for the asset class. Liquidity levels across the funds are also higher than normal so that we can exploit the opportunities that market inflection points inevitably deliver.
So caution is the byword — we are not trying to be the fastest car in the race. We are more interested in making sure that we reach the destination or at least the next waypoint on the map. In the current world, speed is less important than the ability to persevere and survive. We’d rather be mostly right than precisely wrong.
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