The writer is a former head of responsible investment at HSBC Asset Management and previous editor of Lex
When I worked for a top English asset manager in the 1990s, if our performance was suffering, we would fly clients to London with their spouses and put them up in a flat we owned overlooking the Thames. It used to be home to George Bernard Shaw. The view didn’t suck. A couple of nice dinners and a West End show later, I don’t recall ever losing an account.
Those days are gone — and with them, options to soothe angry clients. Hence what has arisen instead is a world-leading industry in the manufacturing of excuses. Simply no one knows how to avoid blame like a portfolio manager. I would go as far as to say it is their main job. Given the vast majority underperform their benchmarks, yet retaining assets is paramount, shifting fault is the only game in town.
And the more money lost, the better the excuses need to be. This year, with many down a quarter, half and even more in the case of technology funds, how on earth was the industry going to pass the buck this time?
The usual suspects — an irrational Federal Reserve, murky Chinese politics, idiot retail investors — wasn’t going to cut it. Bingo! A polycrisis. You could hear the spasms of joy across the investment world when this idea started to gain currency in the summer. We’re saved!
Because you see, dear client, a polycrisis is not like the usual crises you pay us to navigate on your behalf. Oh no. This one has come out of the blue and is bigger than anything any human has ever seen in history — multiple crises igniting each other in a firestorm of risk. Just ask Larry Summers. If he reckons a polycrisis is here, how can you possibly fire us for losing money?
Clients the world over will soon be reading versions of the above in reviews of 2022. My recommendation would be to dismiss any manager or adviser who mentions the word polycrisis. This column is not about taking the idea to task (though it seems to me to suffer from a bad case of apophenia). Rather, placing the blame on it reveals a woeful reluctance to take responsibility for poor returns, not to mention a laziness of mind that you don’t want applied to your portfolio on a daily basis.
I have run money through many crises — from Japanese banking collapses, dot.com bursts, Asian contagions and the “end of capitalism” in 2008 to eurozone near-deaths, Donald Trump, Gulf wars and pandemics. They are always the worst ever. Helps sell newspapers or broker research, alright. And let’s be honest, we all want to feel significant — that we’re living through exceptionally important times. But please end these free passes for the managers of our money. No more polyexcuses.
When the wibbling starts, therefore, raise your hand and ask the following questions. First, why were you happy to own US equities in January when they were trading on 23 times earnings, almost a third higher than the hundred-year average? Shut up about Russia for a second. Why Tesla on 190 times, Amazon on 45 times? Nasdaq was still above 40 times.
How could you have possibly justified those valuations? And why didn’t you sell as soon as the technology bubble started to burst? Why?
And give it a rest on inflation. I don’t care that you thought it was transitory like everyone else.
At the end of a decades-long bull market in fixed income, what I want to know is why you had a large portion of my portfolio in government bonds when they were barely yielding me a positive nominal yield, let alone a real one. The expected return on the asset class at the start of the year was de minimis. You lost me 20 per cent. What were you thinking?
Chinese politics or the state of democracy in America also have nothing to do with the surging prices of energy assets that you failed to purchase throughout the year. Exxon’s share price has doubled.
In fact, your polycrisis doesn’t even make sense here. Beijing’s Covid clampdown actually helped mitigate higher energy costs and thus inflation. Meanwhile, Russia’s war on Ukraine has united the west and spurred renewables spending. All positive developments.
The truth is that asset managers always overpay at the top of a bull market and then latch onto a reason no one could have foreseen as the cause of a correction.
To be sure, talking about Ukraine’s eastern Donbas region and food prices is far more interesting than mean-reverting valuations. But markets always correct. The best investors follow the data, not the latest blog on polywhatevers.