Lehman Brothers: ten years on
The-ten-year anniversary of the collapse of Lehman Brothers has just passed. It has been a remarkable journey for investors over the past decade and probably not one that many of us expected when one of the world’s most powerful financial institutions was brought down in September 2008 and the trust on which the global economy depends evaporated overnight.
Boiled down to its essentials, and with the benefit of hindsight, the 2008 financial crisis is a simple story. It didn’t seem so at the time, however, when we didn’t know how it would end.
Here is the short version. In the years before the credit crunch, banks forgot their basic business of taking deposits and making loans. Instead, they started dealing in the loans themselves, packaging them up into fancy new instruments on a false prospectus that this would make the financial system safer.
This snake oil didn’t wash for two reasons. First, because it was now unclear where the risk lay in these opaque and complex securities, now far from their originators. Second, because in order to feed the banking machine’s hunger for the profitable new products, more and more loans of lower and lower quality had to be made. An old-fashioned credit bubble lurked within a shiny new wrapper. When loans to people who should never have had taken them out inevitably turned sour, no-one knew where the bad smell was coming from. And a system built on the quicksand of broken promises crumbled.
For those investing at the time, it was a truly terrifying period. However, it did not last long. Thanks to bold and speedy action to slash interest rates, flood the system with liquidity and recapitalise the banks, disaster was averted. The equity market recovered from Lehman, and it did so surprisingly quickly. Even if you had been unlucky enough to invest in a collection of global stocks on the last trading day before the bank collapsed, you would have recovered your money within a year or so.
In the ten years since Lehman imploded, the FTSE All Share has more than doubled if dividend income is included in the total return. That’s more than 8pc a year - and if anyone had offered me that as the bankers carried their boxes through Canary Wharf I would have taken it.
The biggest investment lesson for me over the past ten years, however, is that the fog of uncertainty in 2008 has never lifted and never will. As long as we operate in real time, without a crystal ball, we will never know what the next six months, let alone the next ten years, holds for us. And that’s fine, because there is a solution.
As the table below illustrates, investment diversification is the free lunch that sliced-and-diced collateralised loan obligations pretended to be before the crisis. In the decade since Lehman there has not been a single year in which the best-performing asset class has been the same as it was in the previous 12 months. There has also never been a year in which each of the main investment assets has fallen at the same time.
Putting your eggs in a variety of baskets is a lot less exciting as an investment philosophy than the apparent risk dispersion used to justify the weapons of mass destruction launched by the banks in the years before 2008. The difference is it works. It is why I keep banging on about diversification. As Warren Buffett likes to say: ‘rule number one, don’t lose money. Rule number two, don’t forget rule number one.’
Source : Thomson Reuters Datastream, 7.9.18, total returns in GBP.
Slow and steady wins the race: Select 50 Balanced Fund
Diversification is one of the arguments put forward in defence of passive funds. One part of the case for tracker funds is that because it is impossible to know which stocks or fund managers will outperform ahead of time, you are better off simply buying the lot and hoping that the winners outweigh the losers.
That feels like a counsel of despair to me. Far better to combine balance and diversification with a rigorous attempt to pick the winners and avoid the losers. That was the thinking behind the Select 50 Balanced Fund, which we launched in February and which has become one of the most popular funds on our platform in that short space of time.
The Select 50 represents a short-list of our fund selection experts’ favourite investments. These are the funds in which we have most conviction and which, in many cases, also offer investor benefits like discounted management fees. Building on that, the Select 50 Balanced Fund aims for a portfolio to deliver long-term capital growth. Its underlying investments are predominantly sourced from the Select 50 list.
It's far too early to be drawing any conclusions, and past performance is, of course, no guide to the future. But the fund, under its manager Ayesha Akbar, is doing exactly what I hoped it would.
Fidelity Select 50 Balanced Fund
Source: Thomson, Reuters Datastream, as at 7.9.18, total returns in local currency. Fund launched in February 2018 so five year figures not available.
Past performance is not a reliable indicator of future returns.
How are this year’s fund picks doing?
Just as the Balanced Fund has benefited from the high-quality of its underlying investments, so too have my fund picks from last Christmas. This has offset the fact that I was too early calling a rotation from the highly-valued US market to its less-stretched counterparts in the rest of the world.
In particular, I hoped that Europe would finally come good, boosted by a still supportive central bank. I didn’t reckon with trade tensions that leave the export-dependent region vulnerable to a slow-down in global activity. The same could be said of the Asia-Pacific region, which is also battling with dollar strength and weaker growth in China. In the circumstances, I think Invesco’s Stephanie Butcher and Old Mutal’s Ian Heslop have done an excellent job.
Perhaps unsurprisingly, the best-performer among the three picks has been the Fidelity Global Special Situations Fund, which naturally has a significant exposure to the US. That and Jeremy Podger’s stock-picking skills have fuelled a decent run in the first nine months of the year.
2018 fund picks
Source: Thomson, Reuters Datastream, as at 6.9.18, total returns in GBP, figures rebased to 100.
Past performance is not a reliable indicator of future returns. When investing in overseas markets, changes in currency exchange rates may affect the value of your investment.
Politics is about to matter a lot
And finally, before we turn to individual asset classes and regions, I need hardly remind you that the next six months or so are going to be highly-charged from a political perspective. With the Brexit negotiations stepping up a gear in the run up to Britain’s scheduled exit from the EU next March, UK-listed shares face a roller-coaster of conflicting headlines and currency fluctuations.
Over the pond, President Trump is half-way through his first term. Whether he gets another could well be decided by November’s mid-term elections. Expect the Presidential cycle to become an issue for Wall Street. Typically, years three and four of the cycle are the strongest as the President gears up for the next election. But with so much brought forward into year two thanks to tax cuts, perhaps things will work out differently this time.