We can easily get swept up in the rags-to-riches stories of legendary investors of the past, and while the likes of Warren Buffett, Anthony Bolton and Neil Woodford have indeed beaten the market over long and illustrious careers, they are the exception, not the rule.
The rest of us mere mortals seem to end up buying on the way up and selling when markets have tanked, leaving us in the worst possible position when it comes to returns.
Take fixed income, for example. A three-decade-long bull run undoubtedly lulled many investors into a false sense of security, thinking the asset class was by nature less volatile than equities.
As a result, funds such as Bill Gross’s Pimco Total Return Bond and FE Alpha Manager Richard Woolnough’s M&G Optimal Income have swollen to unprecedented multi-billion pound sizes.
Now it seems that someone slammed the brakes on the rise in fixed income gains and investors are all but running for the door.
While there doesn’t seem to be an all-out sea change from bonds into equities yet, there has certainly been a shift in attitude about which qualities investors previously thought were inherent to bonds or shares.
This has been a problem for those investors trying to time the moves between equities and bonds and also for those who set up their asset allocation for the longer term, based on assumptions about how bonds would behave.
Many investors, however, retail and professional, are making their moves too late. Equities have already experienced a bull run that has lasted longer than 12-months, so if you are buying in now, you are buying in at a much more expensive valuation than you would have seen 12 months ago, missing what could end up being the best of the returns. And how much further can valuations reasonably go?
Hargreaves Lansdown’s Mark Dampier (pictured) disagrees with the assertion that asset allocation makes up the biggest portion of long-term outperformance.
"Asset allocation is remarkably difficult. Even the professionals might just get one call right and the others wrong," he said. "There is an assumption out there that picking stocks is really, really difficult and asset allocation is easy. In theory that may be true, but in practice it rarely is."
Dampier points out that even some of the best managers out there have got their asset allocation calls wrong, which makes the supposed ease of asset allocation over picking good companies all the more suspect.
He points out that even though Jupiter’s Philip Gibbs has a stellar reputation as an investor, he got his macro calls wrong and fell apart in his final years running the Jupiter Absolute Return fund.
Jupiter Absolute Return has lagged behind its peers over one and three years, losing 0.12 per cent over the last 12 months.
Since launch in December 2009, the fund is 10 percentage points behind the IMA Targeted Absolute Return sector and has also underperformed against its cash benchmark, LIBOR GBP 3m.
Performance of fund vs sector and index since launch
Source: FE Analytics
Dampier adds that Artemis’s William Littlewood, who he rates and invests in, has been shorting the bond market, which he points out really isn’t where you’ve wanted to be over the last few years.
The manager has lagged the IMA Flexible Investment sector and FTSE APCIMS Stock Market Growth index over one and three years.
Performance of manager and peers over 3yrs
Source: FE Analytics
Even FE Alpha Manager John Chatfeild-Roberts, who runs the highly rated Jupiter multi-asset portfolios, got one macro call wrong when he bought into Japan in 2006, and was also hurt by a high weighting to emerging markets over the summer.
"On the whole I’d rather take the Woodford approach and buy companies I can hold through thick and thin," Dampier said.
Instead of worrying about asset allocation, geographical placement or sector bias, Dampier says it is instead far more important to pick good managers who have proven track records over the long-term.
He adds that on the diversification front, investors should hold managers who have differing viewpoints to avoid being caught out by the market rather than throwing piles of money into either equities or fixed income.
"It’s best to have different managers with different viewpoints," Dampier said.
"You might want to hold someone like Martin Gray, who is notoriously bearish, with something like a UK smaller companies fund, for example."
Gray, who has a stellar long-term track record on his Miton Special Situations portfolio, has been lagging the market over the last few years because he hasn’t bought in to rising sectors.
The manager’s bullish stance has made him much more cautious and careful, which means he tends to outperform in falling markets – such as 2008 and 2011 – but lags behind his peers in rallies.
Dampier says that the current environment in which both bonds and shares seem to go up and down together makes asset allocation particularly difficult.
"Even asset allocation between bonds and equities is difficult now because if you are bearish on bonds, how can you be bullish on shares?"
So ignore the noise about asset allocation, he concludes.
"The reality is that it is one of the hardest things to do of all," he said.
