For starters, there’s been a whole lot of fuss around the Fed removing “patience” from its official statement in last week’s policy meeting, leading to market speculation of a rate hike.
When exactly this will happen is still open for debate, though it’s worth remembering that the Fed is only committed to raise rates when it has seen meaningful improvement in the labour market and at the sign of inflation moving back towards 2%.
So what does this mean for investors, and whether or not they persevere with risk assets?
“US equities reversed their recent slump on perceptions that Fed officials would hold off for a bit longer on raising rates, but by most measures, US equities are expensive,” says Alan Higgins, UK CIO for Coutts.
“If Fed patience is based on a moderation in economic growth, they may struggle to extend their gains on such hopes. We see growth momentum in Europe overtaking the US and helping to lead the way on a gradual improvement in global economic growth, which should be good for equities in general.”
Still, with the Dow, S&P 500 and FTSE 100 all hitting record highs this year it makes sense for asset managers to also adopt a stance of caution in the face of a possible correction.
Enter one the UK’s largest fund groups Invesco Perpetual that has gone so far as to build its marketing campaign around its (trademarked) patience philosophy for UK equities. The campaign is around “holding your nerve”, “sticking to your convictions” and “staying calm when everyone else is selling, or buying”.
None of these ideas should be especially new to top-tier fund managers – of which Invesco has its fair share – though it will be interesting to keep a close eye on the turnover of key funds if the worst does happen and we experience another major setback in markets.
An alternative route may be to side-step the FTSE 100 altogether. This is something that another top fund manager Neil Woodford, ex of Invesco of course, will be working on (to a certain extent) with his soon-to-be-launched Woodford Patient Capital Trust.
Commentators I have spoken with appear split on whether or not they will invest in the trust when it opens next month, though those that will are looking to the long-term horizon given the nature of its investments in early stage businesses.
“Investors need ask themselves does this fund meet their appetite for risk and are they able to invest for the long term, at least 10 years,” says Adrian Lowcock, head of investing at AXA Wealth.
“This fund should be considered riskier than other smaller companies’ funds because it will invest significantly in unquoted investments.”
So there we have it, three different takes on patience. On the macro, the Fed’s removal of the word means investors must prepare for the impact of the starting of the tightening cycle from the world’s largest economy.
The message from one of the country’s largest retail fund groups is that short-termism is a disease of the UK market; the very best ideas are often mispriced for a long time. And for Neil Woodford, profiting from the next generation of innovative companies will only come though the deployment of long-term patient capital.
In summary then, equities are expensive, the macro could move very quickly, and investors need consider new ideas if they are going to profit in the long term.
