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Baillie Gifford and learning to say I am sorry…

Saying sorry

Baillie Gifford and learning to say I am sorry…

Perhaps understandably the words ‘financial planner’ and ‘sorry’ don’t get to feature in the same sentence all that often.  But if Elton John’s lyric “sorry seems to be the hardest word” is true maybe they should.

Indeed, as Shona happily tells me, saying sorry is something I’m not very good at! At home her point is ‘maybe’  valid, however professionally it is a word I am learning to embrace and indeed now welcome saying.

Firstly, Baillie Gifford and FOMO

But, before I get to my ‘sorry’, let’s have a look at a cautionary tale…it is related!

According to the Sunday papers investing seems SO simple. On 1st January, you simply work out which funds are doing really well, move your money to them, sit back and enjoy, GET RICH and wait for that delicious sense of smugness to wash all over you!

Indeed, at the beginning of 2021 it was SO OBVIOUS which asset classes/ funds to select – US tech and large cap growth funds were on fire and if you didn’t act fast then more fool you!!

Baillie Gifford - Table 1

FOMO – Fear Of Missing Out

Those familiar with my tutorial sessions will know the biggest enemy to an investor is mostly him or herself. Experience has taught me that the actual investment returns we end up experiencing, are nearly all a function of our own behaviour.

As your trusted adviser, my job is to sit between you and the temptation of the Baillie Giffords of this world as when faced with these kind of figures most investors are at least tempted to ‘follow the performance’.

And you guessed what happened next – yes, Baillie Gifford experienced HUGE INFLOWS after this spectacular outperformance! It has ever been thus!

Baillie Gifford - Table 2

As Laith Khalaf, Head of Investment Analysis at AJ Bell, put it “DIY fund buyers didn’t get the memo that value investing is back in fashion, instead largely plumping for growth strategies over the course of 2021…”

This of course is nothing new. Countless studies tell us that this kind of behaviour happens all the time. Investors chase returns but rarely end up experiencing anything like the performance that has gone before.

This can be summed up in three simple words – ‘Winners, Rarely, Repeat’.

If we can’t pick the winners in advance then what can we do?

Thankfully a successful investment approach doesn’t have to try and pick the next Baillie Giffords (as it’s impossible to do in any reliable fashion).

Instead, a good strategy looks to rely on actual evidence based on the last 80 to 100 years of market data. Like ‘location, location, location’ is the first rule of property, ‘diversify, diversify, diversify’ is our first rule of investing.

You see good diversification looks something like this:

Bettr Diversification - Chart

Obviously there are more than 4 funds in our portfolios but the above table broadly demonstrates what happened in 2020 and 2021. Investments A and B went from the winners to being the losers and Investments C and D did the opposite!

In fact our typical portfolio holds 9 different asset classes (‘eggs’ for the purpose of what I’m going to say next!)

9 eggs

Being properly diversified means ‘lots of eggs in lots of different baskets’. Each egg (asset class) is in there for a very specific (and crucially evidence-based*) reason. Some are there to target high investment returns others are there to provide stability. As said our typical portfolio contains nine different eggs.

As the world economy moves through different cycles each ‘egg’ in the portfolio is designed to behave differently to all the others ‘eggs’. Some by a lot, others by not a lot.

This means that in a typical year you will likely be saying sorry for 2/3 eggs in your portfolio.  You see a properly diversified portfolio all but guarantees you’ll be unhappy with at least some part of it EVERY year. But the parts that make you unhappy (and by definition happy) change nearly every year. One set of investments zig while another set zags. Take this unhappiness as a sign we’ve got your diversification right.

*evidence-based investing gives an investor the best chance of a successful outcome.

Lessons learnt

In years like 2020 US tech and growth shares were the obvious winner. Being diversified was a drag on performance and when one type of investment does so much better than the others, it seems insane to diversify, let alone rebalance.

But that’s the problem with judging a tool like diversification from one year to the next. You need to judge diversification’s value over the long term. You’re not diversifying because of how shares or bonds did last year. You keep diversifying because you don’t know how they’ll do over the next 10 years.

Value’s rebound rewarded investors who stayed in their seats

So if we’d been tempted by BG’s stellar performance, we most probably would have swapped some of our precious ‘Value’ positions for ‘Growth’ – the style of investing BG followed.

Our portfolios instead have an extra weighting towards Value shares (as the evidence tells us that we will be rewarded over time with higher expected returns).

Since late 2020, Value has had an amazing turnaround with disciplined investors (those who chose to remain invested following its prolonged slump) being well rewarded.

This recent turnaround is a reminder to us of how quickly these higher returns (premiums) can show up. Value’s outperformance over Growth tends to come in large unannounced spurts so you will only benefit from it if you can stay invested through the down times.

So after three torrid years (to June 2020), the pendulum has swung back to Value and whilst I was sorry for how Value performed in 2019 and early 2020 I trusted the evidence (as I always will!) and we have been rewarded handsomely since.

Dimensional - Chart

So the next time you read or hear about (or worse still are tempted to chase) stellar fund performance, just remember that you may get it right.  In that year. Or the next. But if you try to chase the winners and do get it wrong, make sure you have a calculator handy. You’ll need it to work out how much you’ll have lost… and maybe worse than that…having to say sorry to yourself (and maybe others) will definitely be the hardest word you will ever end up saying!

This article contains the opinions of the author but not necessarily the Firm and does not represent a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but is not guaranteed.

It does not constitute investment advice, recommendation, or an offer of any services or products for sale and is not intended to provide a sufficient basis on which to make an investment decision. It is the responsibility of any persons wishing to make a purchase to inform themselves of and observe all applicable laws and regulations.

Past performance is not indicative of future results and no representation is made that the stated results will be replicated. There is no guarantee strategies will be successful. Investments involve risks. The investment return and principal value of an investment may fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original value. Past performance is not a guarantee of future results. There is no guarantee strategies will be successful. Diversification neither assures a profit nor guarantees against loss in a declining market.

Errors and omissions excepted.