My heroes fall into two categories - sporting greats and scientific greats. I am happy to place Freddie Flintoff, Roger Federer and Brian Clough along side Albert Einstein, Marie Curie and Sir Isaac Newton in my personal hall of fame. Newton’s three Laws of Motion have opened the minds of generations of students to the wonders of physics and provided them with a trusted framework to interpret their observations of the natural world. His genius, however, did not extend to investing. Sir Isaac famously lost a fortune in the south sea bubble, leading him to write ‘I can calculate the movement of the stars, but not the madness of men’.
At Affinity, alive to the lessons Newton would have wanted us to learn, we too have established a framework to assist us in analysing and interpreting the world. Our investment philosophy and principles provide a consistent structure to our decision-making process and strongly influence the shape of portfolios we manage for our clients.
A cornerstone to this framework is the recognition economic power is rebalancing and investing to take advantage of this provides great opportunities for those investors prepared to adopt a long-term view. Through this current decade China, Russia, India, Brazil, Mexico, South Korea, Turkey and Indonesia are, collectively, forecast to increase their contribution to global economic growth to a far greater extent than their developed-nation counterparts. These ‘growth’ economies will see their US$ size of GDP increase by c.US$16,000bn from 2010-2019, which compares, for example, to c.US$3,000bn from the US and c.US$2,000bn from Euroland*.
For equity investors, we know expanding economic activity alone does not translate into attractive investment returns. Whilst it is important, two other factors are generally required; attractive valuations and excess liquidity. Taking a long-term view, current equity valuations suggest investors will enjoy above average returns by committing capital to these markets. Moreover, low debt levels and FX reserves indicate their governments can provide the required liquidity through economic and fiscal stimuli to shelter their domestic economies from the headwinds being exported from the West.
This rebalancing of economic power is underway although it will not be a smooth process, as investors in risk assets have learned over recent years. It is, however, a powerful long-term trend and one that features in our Growth Strategy. We ask our clients to accept a 10-year investment time horizon before allocating to this and it will incorporate exposures to core holdings and trends which we believe are unlikely to change for a number of years.
This long-term mandate and the approach we employ brings us to the unofficial fourth Law of Motion. Warren Buffet, one of the most successful long-term investors of our time, has updated Sir Isaac’s famous work with this additional law; For investors as a whole, returns decrease as motion increases. For this mandate, this is something to which we firmly subscribe.
*Goldman Sachs Asset Management – ‘Investment Themes in a Growth Market World’