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Investment view

What is an investment process? I know what you are thinking. If someone in the investment business needs to ask that particular question, should they really be managing money? Perhaps what I really mean is what do you understand by an investment process? It is, after all, a term that is increasingly common. Clearly, it means different things to different people.

What prompted me to reflect on the meaning of an investment process was an internal seminar designed to explain how the output of our research department should be used in portfolio construction. It may not sound the most riveting way of spending an hour but it certainly brought home how much the marketplace has changed over recent years. If the bear market has achieved anything, it has ensured that portfolio managers define the likely outcome for an investment mandate more precisely.

In the end, there is a great deal of subjectivity in investment management. It is all about exercising judgement. To make the best of your decision-taking opportunities, you need sound information – hence, the need to understand how the research department works. But in a world where the customer is increasingly sceptical and unlikely to tolerate poor delivery, providers need to be certain that their processes will stand up to scrutiny and are observed by the people charged with conducting portfolio management.

Explaining to audiences of both investors and advisers that the investment world remains a less friendly pond in which to fish has proved testing but not disheartening. Last week saw me in Suffolk, London and Devon, expanding on how best to cope with today&#39s difficult conditions. There was more optimism than I expected. People do have cash to invest and there are a few signs that new money is coming back into the market. Too many new client wins have been the result of disenchantment with a previous adviser recently, so the thought that investors will consider financial assets, rather than buy to let, is encouraging to say the least.

The question of which class of financial asset will deliver the best return is, of course, more open than ever. According to a recent study by JP Morgan, bonds have produced a superior return to equities over the past 16 years. Whether there is any significance in the duration of this outperformance is debatable but it is a sobering thought that a combination of poor equity markets and falling interest rates has upended the perceived wisdom that equities provide the best long-term returns. Whatever you consider 16 years to be, short term it is not.

The bonds versus equities argument was played out on a television screen last week with Roger Nightingale, chief strategist of Sarasin, and myself taking the red and blue corners. Roger was remarkably upbeat both for equities and bonds. Japan inevitably gained a mention. For those who feel that the fall in the yield of British Government securities from over 15 per cent to little more than 4 per cent must mark the end of the bull market, we were reminded that bond yields in Japan have fallen to below 1 per cent.

The prospect of 2.5 per cent yields in the UK should not be ruled out, according to Nightingale. Two-and-a-half per cent was the coupon attached to the Consol issue when a 19th Century Government sought to raise money for public expenditure. Consol 2.5 per cent still trades today at a price of little over £55 per cent to yield around 4.5 per cent. I remember when the price once fell to nearly equal the yield – around £16 per cent, as I recall.

Last week&#39s other enduring story was the fall in sterling. Now approaching 70p, the euro has continued its upward march but the pound is now falling against the dollar as well. This may be an over-reaction – the appropriate level for sterling against the euro for convergence purposes is generally reckoned to be about 67.5p – but those who bought their holiday homes in France and Spain a year or two ago now have a currency advantage to compensate for the slower rate of capital appreciation that foreign homes generally enjoy.

I knew I should have already bought my place in the sun but, as I keep reminding my junior colleagues, 20/20 hindsight is a bad trait in an investment manager. Better instead to concentrate on understanding the investment process so you can meet those investment objectives.


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