Aled Smith
Investment Director

Fund managers offer their clients a return stream for a given level of risk. Many fund groups, including JOHCM, invest by focusing on the fundamentals of individual securities. But returns are also heavily influenced by secular and cyclical trends; context is important.

Forty years ago, in the early 1980s, we began a new era of declining inflation, falling commodities prices and lower bond yields. Equities rose strongly and, importantly, correlated negatively with bond yields until around the time of the Asian crisis in 1997. This was likely the start of the shift to an era concerned about deflation and exacerbated by the tech bubble and a subsequent world of excess supply. A new language of risk parity, risk-on/risk-off took hold. In 2018, we saw equities and bonds selling off together, and debate has picked up as to the shape of the world ahead.

Forecasting is notoriously difficult (which is partly why JOHCM is decentralised). But any discussion of the future should involve prices. What we know is that asset prices move the most when people change how they feel about owning them. This is always worth monitoring, and the UK makes for an interesting live case now that its recent general election has brought greater political clarity and seemingly reignited interest in UK equities.

What does this all mean for active management? The difference between passive and active approaches can be thought of as the difference between rule-based investment and judgement. Today’s rapidly changing world requires judgement. We have seen the relentless rise of new technology-based business models that have disrupted sector after sector, with devastating consequences for slow-to-respond incumbent firms. In our own industry, we have seen the explosion in ETFs and low-cost, machine-driven investment cast a looming shadow over the active investment industry. And we have seen ESG go from being a fringe investment concern into the mainstream. ESG is now already firmly within the risk component of the fund manager’s job. What’s new is the attention now paid to the impact of investments. There isn’t much point in ESG investing, in aggregate, if it doesn’t help tackle the huge challenges posed by climate change, ageing populations, food security and other themes pivotal to all our long-term futures and the eventual enjoyment of those return streams that we fund managers are aiming to generate.

To that end, we were pleased to announce recently the launch next year of a Global Equity Impact strategy with our responsible and impact investment affiliate Regnan. This follows the appointment of a Global Equity Impact investment team, who will join us in our London office in 2020. Our new team believes that we have entered an era where companies that help meet the sustainability needs of society and the environment, as set out by the United Nations Sustainable Development Goals (SDGs), will thrive.

Given the above backdrop of powerful structural trends including technological change, an exceptionally long, albeit slow, global economic expansion, and the critical importance of ESG in investment decision-making, we need to consider the pricing of risk. This is where high conviction active management, backed by a commitment to capacity management that safeguards portfolio liquidity in order to preserve investors’ interests, can make a difference.

This piece contains the current thinking of a selection of our teams of active investors. As you will read, there are plenty of views from around the world. If anything sparks your interest, please do get in touch.

Good luck in 2020.