It is an inescapable fact that all investment advisers must take a view on the future. Even a simplistic approach of avoiding ‘fund managers’ and using stock market index tracking funds relies on a view that stock markets will out-perform everything else in the long run. When RBS predicted a cataclysmic year for 2016, with US and EU markets predicted to be down by 10% to 20% and Oil reaching $16 dollars a barrel, it was seized upon by the press and widely publicised. So was RBS right? Why was it so publicised? What was the Alexander Beard Response?
So firstly, at the headline level, RBS was cataclysmically wrong. It was a good year for investors in the UK and anyone that sold stock market investments would have been left behind. The average investment fund produced a return of +13.29% (Mixed Asset 40-85% Equities Sector average for 2016). The average return for North American funds was a whopping 31.23% and Europe excluding the UK was 16.45%. Oil finished at over $50 a barrel. It was almost the complete opposite of the RBS prediction, but mainly due to the fall in Sterling post-Brexit, so that the value of overseas investments rose in Sterling terms.
In fairness, RBS said “sell everything except high quality bonds”. Appling this to the Unit Trust world, this would normally mean keep hold of any funds in the sectors of Gilts, Index Linked Gilts and Sterling Corporate Bonds. Respectively, these sectors had average returns of 10.84%, 23.88% and 9.06%. Not so bad after all; anyone following their advice would not have been massively disappointed in the end.
The RBS statement was probably so widely reported because it really was at the very extreme end of expectations. Studies of pundits and media reporting (carried out by Philip Tetlock^) have shown that extreme predictions tend to be the most popular in the media and are widely reported. Extreme predictions are also statistically far less likely to happen. So it is no surprise that the RBS release was so widely seized upon and didn’t ultimately materialise. It is also true that the message from RBS was quite simple: “sell everything except high quality bonds”. Much easier to disseminate than: “Maintain a balanced portfolio, 2016 could go a number of different ways given the EU Referendum and the US Election, but interest rates and inflation might prove more important – wait and see.”
What was the Alexander Beard response? Soon after the RBS release I was asked by some advisers what our position was in response to the announcement. I said we don’t have one (polite version). Our approach is not determined by headlines, we have robust internal processes for determining our advice that consider the views of more than 15 investment houses on specific sectors, we also draw on surveys by the Bank of England and World Bank predictions. RBS is included in the Bank of England Survey as one of many participants but it is far from a lone voice. And RBS was not completely wrong – some of the predictions were sound.
We didn’t see any headlines proclaiming that “ACME Investments called it 100% correctly for 2016!”. Why is that? Because the world is so complicated that it is impossible to be totally correct. It is the smaller degrees of wrongness that determine investment success. We aim to minimise wrongness by using a variety of sources in our Managed Portfolio Service, rather than dancing to the tune of the headlines. That’s why I made a little note to return to this topic in January 2017, as the true ABG response.
Please remember the value of your investments can go down as well as up, so you could get back less than you invested.
Investment Director and Partner
Performance figures sourced using FE Analytics.
^ Philip Tetlock Superforecasting: The Art and Science of Prediction; 2015