Why the Election Rally Will Be Shortlived

Editor's Views: A Boris bounce is welcome but may not last, Mark Barnett is given his marching orders by the Edinburgh board and why you shouldn't judge a fund by a year's performance

Holly Black 13 December, 2019 | 10:02AM

editor

The UK stock market has woken up with a spring in its step this morning; it's amazing what a tiny bit of clarity can do. The beleaguered FTSE 250, full of all those unloved domestic-focused British businesses has surged 4.5% already, while more than a dozen stocks on the All Share are sitting at double digit gains. 

If this puts the UK back onto investors' "nice list" in time for Christmas, that's no bad thing, but I suspect today's relief rally may end up being short-lived. After all, we still have a long way to go before Brexit is properly resolved and much is still unclear about Mr Johnson's plans for the next five years. 

So I guess this is as good a time as any to wheel out my regular reminder about the importance of investing for the long term, and not trying to chop and change and churn your portfolio to time the market. Because, if 2019 has shown us anything so far, you just can't call what's going to happen next. 

Should Barnett Have Been Given More Time?

Mark Barnett seems to be taking his efforts to follow in the footsteps of his mentor Neil Woodford to a whole new level. This week the struggling fund manager was removed as manager of the Edinburgh Investment Trust, which he has run since 2014, when the reins were passed to him from… you guessed it.

One of the many reasons to like investment trusts is that they have independent boards. These boards are there to hold the manager of the trust to account – they approve the investment strategy, the amount of gearing (borrowing) he can take on, and they can wield the axe if they deem it necessary.

Edinburgh’s board is to be praised for taking such decisive action. Few funds can deliver every single year but I’d say three years is long enough to put up with poor performance.
Yet many people seem to be rather underwhelmed by Edinburgh’s choice of replacement, in James de Uphaugh of the Majedie UK Equity fund, and concerned about the board's choice to opt for another manager with a value style of investing. Certainly, Morningstar’s own analysts rate the fund at a rather lacklustre “Neutral”.

But sticking with the style does seem to make sense - the trust still believes in its investment strategy, just not in the capability of the current manager to execute it. But I can't help but wonder whether Barnett might have been given longer to turn things around if he hadn't been tainted by his association to Woodford. 

Consistency is Key

All too often the funds that get the attention are those that shoot the lights out year after year. But finding one of these is like finding a needle in a haystack (apologies for the obvious cliché). Investment is frequently far more cyclical than all of that – sectors, stocks and investment styles fall in and out of favour, often for no discernible reason.

But what to do when these investments lag? Some people would tell you to sell your leaders and buy more of your laggards, others say cut your losses. But if you’d ditched some of the worst performing funds in 2018, you would have missed out on some of the greatest gains in 2019.

Our analysis of the funds that went from zero to hero highlights precisely why you should never judge a fund by one year. Some of these funds were down 10 or 20% last year – you could be forgiven for being tempted to sell after that – only to shoot to the top of the leader board in 2019.

Of course, while that’s all very exciting, it shows the importance of not just relying on one measure of performance if you are considering adding a fund to your portfolio (or, indeed, considering ejecting one). It doesn’t pay to look at one year in isolation – for long-term returns, consistency is the key.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

About Author

Holly Black  is Senior Editor, Morningstar.co.uk

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