Jonathan Marriott – Chief Investment Officer, LGT Vestra LLP
What impact do you see from Trump’s state of the union address?
Trump has made his plans to “make America great again” clear, but the response to Tuesday’s address was that he was in fact making America wait again. There had been speculation that we would see more details in his speech but it was mostly a reiteration of the campaign promises. He did, however, back NATO which will please Europe. In addition, he confirmed his plans to spend a trillion dollars on infrastructure, increase spending on the military and expressed his wish to cut taxes. How he will pay for this is yet to be made clear. The Congressional Budget report in January this year estimated that the deficit in 2017 would be $559 billion or 2.9% of GDP without any changes in federal spending, so 1 trillion dollars is potentially a very significant number and with military spending up and taxes down he will need to find the money somewhere. He will be looking for public private partnerships for much of the infrastructure spend and a growing economy may increase the tax take in the long run but for now, borrowing is likely to have to rise. The current debt ceiling (the restriction on government borrowing) agreement expires on the 15th of March, the same day as the next Federal Reserve meeting, which may raise rates. Rising interest rates may also add to the deficit over time. Debt ceiling negotiations have often been spun out and this year may be no exception, but with a Republican majority in both houses this may not be a problem. Fiscal conservatives in the Republican Party may not give Trump as easy a ride as he would like.
America may have to wait again and Trump should perhaps “beware the Ides of March”.
Where do you sit in the active vs. passive debate?
It is often said that a monkey with a dart board can do better than most active managers. At times it has been hard to add value in some developed markets. The distribution of information is much more efficient than in the past, meaning that news is priced into stocks very rapidly which can make it hard for stock pickers to distinguish themselves. However, passive funds tend to be weighted on the basis of market capitalisation and as a result they own more of companies that have already performed well. I prefer to look through what fund managers are doing and select funds that are picking stocks in ways that fit with our world view and complement each other. I expect the dispersion of stock returns to continue and am seeing correlations breaking down. In this environment we think that successful managers will have opportunities to outperform. Careful selection of managers is more important than ever and while many managers will underperform there are those that can add value.
The passive market has addressed some of the shortfalls with so called “smart beta” funds. These take alternative weightings methodologies based on investment styles or mathematical formulae. I am suspicious of strategies that show good back tests based on formulae that have been adjusted until they show just that. One never sees a bad back test. These often work initially but fail in the longer term as, as we know, ‘past performance is no guide to future returns’.
Passive or tracker funds may be an easy and low cost way to access markets but in general I would prefer to select managers who make real decisions on portfolios. That said, in a world focused on the bottom line, passive funds can be used to lower the total cost of a client portfolio.
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