Aylett Balanced Prescient Fund Comment - Sept 2014 - Fund Manager Comment11 Dec 2014
Our fact sheets over the last twelve months have consistently expressed our concern about the level of global markets. This has been further expressed in our low risk portfolio (lots of cash), very little exposure to risk assets (emerging markets), no precious metals and hardly any exposure to high yielding assets. In short, it's a boring portfolio. Until last week, we were underperforming the market and our peers by almost all measures and yet in the last week, (markets have seen a small correction) it's been quite surprising to see how fast this has changed. An informed investor phoned to tell me that our conservatism has paid off. My response was that it is too early to tell. Now might be a good time to revisit some of our concerns. A word of warning: our concerns are not to be interpreted as forecasts. In this department we have failed dismally and have often proven to be too early.
By now it seems safe to say that the markets, the USA in particular, have been driven by the expansion of the Fed balance sheet. This balance sheet expansion is coming to an end. I think that the market may decide that once the Fed has finished tapering, it will not be quick to raise rates. This could be a mistake.
The economy could do just fine but the stock market may not. The strong dollar may have serious disadvantages for economies that have benefited from a weaker dollar - suddenly their products become more expensive for their customers. Think of a European retailer paying for a garment from Hong Kong. The low interest rates are allowing disruptive technology companies to fund their expansion while not charging for their services. How many of us have had free rides from UBER for referring friends and family to their service? Another disadvantage of these disruptive technologies is the havoc they have unleashed on existing "old world" businesses. Again, think of UBER versus the London taxi industry where it can be 30% cheaper to use UBER than a black cab. In the USA the purchase of a small device called Magic Jack, plugged into your computer, allows you to speak unlimited to a USA / Canadian number for 3 dollars a month! Take that Telkom. My point, by referring to these examples, is that we are entering a world where comparisons to the past will lead to outcomes that may not turn out as expected. Capital loss may become permanent and risk will be defined as it should, by the loss of your purchasing power (after allowing for inflation) and not after some Greek symbol.
Finally, we'd like to reiterate an important ingredient for wealth creation - patience. Be patient, disregard the short term noise and volatility and think about the long term. This has often rewarded investors. -