It's a Small World

It’s a Small World
Yes, at times every stock market and in 2018, almost every asset class seems to be highly correlated unfortunately in last year’s case – to the downside. One could be forgiven for thinking that means the investment world has become smaller. Perhaps the weight of money pouring into passive investing effectively making big companies bigger has also had an impact. So too, President Trump’s tax cuts that helped big US corporates and by default, helped the US market outperform other geographies last year, although anyone who believes in mean reversion would take a look at the chart below and think that outperformance is unsustainable.

Regular readers will know that our preference is to invest thematically rather forecast the economic outcome of individual or regional economies as is typical of the investment industry.
While we can point to the enduring demand for services within themes such as living longer, sustainability, nutrition and security for example, one of our key themes is being able to invest in smaller companies. This ability is often not available to large scale investors as they are simply too big to access the opportunity set without swamping it. Not a problem for us or those that invest with us.
To understand why this theme is important, it is worth looking at the returns smaller companies have delivered over the past ten years. The following ‘quilt’ of asset class returns not only shows how difficult 2018 was but also shows that the top two performing asset classes over the past ten years (top right) have been smaller companies.
There will be times when markets become more highly correlated and in thin markets, values will fall across the board. We and other investment groups will not be immune from that, however, investing requires a longer term mentality than a quarter or a year.
To quote the recently departed John (jack) Bogle, ‘Time is your friend, impulse is your enemy.’

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