• Christian Armbruester

Iceberg Ahead


Is it really better to be lucky than smart when it comes to choosing our investment managers?

If you were driving in your car on the Autobahn and you suddenly hit a thick patch of fog, would you push down on the accelerator or reduce your speed? Whilst the answer seems rather obvious, think about what the world went through in March of this year. Sticking to our analogy, what made things even worse is that on top of driving blind there was the real possibility that we could hit a giant iceberg in the middle of the road. Yet still, many investment managers either maintained or increased their risk positioning. Rather ironically, it is these very investment managers, the ones that ignored all the warning signs and recklessly put our money at risk, that are now being chased by investors, because you know, they delivered the best performance.

Now, I am not advocating that we should put our money with those managers that have vastly underperformed the recent rally. Just as bad as increasing risk in times of uncertainty is taking all risk off the table. In other words, calling the crash is just as futile as hoping for the next bull market. However, it makes little sense to buy in fear of missing the rally, when the rate of COVID-19 infections is still rising, the economics are horrendous and there seems scant hope that the situation will change anytime soon. As ever, when we don’t know, and the situation is entirely binary, we need to be somewhere in the middle. That way we can react if things worsen, but we are still exposed to the upside in case they don’t.

So, what to do when assessing money managers’ performance in the last quarter? For one, don’t just look for people who made money in March as if it were some rite of passage. They may have been short for years, losing out on massive returns, and finally got lucky. Two, make sure they changed their positioning. The world has changed, so much so that government debt now bears negative yields in many countries and we simply can’t do the same things we used to do. In fact, if any manager didn’t take the opportunity to rebalance, particularly when the markets delivered such gifts as going up 40% from the lows, they have no business managing our money.

Finally, do not look for answers. Any investment view right now is utterly and completely useless. No one knows. Not the governments, not the central banks, and certainly not the economists. Why? Because, we don’t have a cure for the common cold, so the prospects of quickly developing a magic potion to get us out of this mess seem rather slim. Ultimately, once we find a way to control or live with the virus, it will be the behaviour of the consumer that will determine how quickly the economy recovers and predicting that has proven to be notoriously difficult. Taking our risk down when we don’t know where we are going, is the only option on the table. The name of the game is to keep playing, rather than betting it all on black and hoping for the best.

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