The first half of 2022 offered very few hiding places for investors. Deutsche Bank reported positive returns in only four of the 38 asset classes under its coverage – even lower than the seven that managed a positive return in the midst of the financial crisis. In America the S&P 500 suffered its worst first half since 1970, whilst the more growth orientated Nasdaq index recorded its worst first half performance ever. Not to be outdone, the FTSE 100 rounded off the period with its biggest monthly drop since March 2020 when Covid-19 first hit. At the same time, cash held on deposit saw its value viciously eroded by inflation that reached its highest level in 40 years on both sides of the pond.
Concern and uncertainty amongst both consumers and investors has been caused by the combination of the ongoing conflict in Ukraine, stubbornly high inflation and increasing interest rates.
As is often the case during times of stress, investors’ time frames have shortened meaningfully and focus has shifted to businesses who are expected to justify the majority of their value in the near future; tobacco, energy and commodity companies are good examples. And it is through understanding this that one can understand the disappointing year to date performance of the Coleman Street Funds which hold a preference for businesses with high barriers to entry, enduring and attractive financial characteristics and the ability to grow over long periods of time.
It remains our belief that superior financial performance will be driven by businesses in structural growth markets, with loyal customers and attractive economics. And that, when bought at a reasonable price, superior financial performance will drive superior share price performance. As a result, we have continued to allocate capital to a number of high quality assets but have retained exposure to both defensive and cyclical end markets in doing so.
It is a challenging time for investors at present and we think it is a useful time to remind ourselves of a recent observation by the renowned investor, Howard Marks that, ‘in the real world things fluctuate between pretty good and not so hot, and in the market, things fluctuate between flawless to hopeless’. It is these mood swings of the market that offer opportunities to the long-term, rational investor.
James is the manager of the Coleman Street Investment Service
The value of securities and their income can fall as well as rise. Past performance should not be seen as an indication of future results. All views expressed are those of the author and should not be considered a recommendation or solicitation to buy or sell any products or securities.
