Why discipline matters in rapidly changing markets
4 min read 29 Apr 24
In the 20 years that I have been working at M&G, the financial system has markedly changed, as has the nature of bond markets. Unlike the equity market, which has essentially stayed static in its structure, bond markets have been dynamic, meaning that we are constantly learning as new opportunities present themselves.
While this is great because it means we can add value, what hasn’t changed is our process, which is underlined by discipline. It drives our basic principle of getting involved in the market where we are being paid to take risk, but equally we are also happy to sit back and not get involved where we are not being paid.
Being disciplined is important because markets change rapidly – and even more so in a world driven by the constant 24/7 news cycle. Let’s say we have an economic view that there isn’t going to be a recession. For three months, the market may think that there’s going to be a recession, and that interest rates will come down and credit spreads will go up as the probability of default increases. That is then followed by three months where the market thinks there isn’t going to be a recession. For those three months, we look clever, but for the previous three months we looked foolish. While the market goes from panic to pleasure, from fear to greed, we try to stay a steady course.
Going against the grain
Our fundamental value anchors around credit, yields and interest rates – the things that effectively drive what we do – stay more or less consistent, it’s the marketplace that doesn’t. This is good for us as we don’t want an efficient market.
If I were to give one piece of advice to an investor at the start of their career, or indeed anyone looking to find an edge, it would be to think for yourself. If you always follow the consensus of the market, then you will only ever deliver the market beta. In order to outperform, you need to be comfortable in having a view that is against the consensus. You need to trust your own judgment. You can’t really do that when you are starting out though because you don’t know if you have judgment. You only get it through experience and testing yourself.
Regardless of exactly what is happening in markets, when I come into the office my first job is to look at the structure of the portfolios that I manage to make sure they are positioned as I want them to be. I look at the UK and European bond markets in the morning and then move on to look at the US once it has opened in the afternoon. Our Emerging Market team also helps me stay on top of what is going on outside Developed Markets.
In the investment bunker
Throughout the day, I maintain a constant dialogue and interaction with the rest of the team. Everyone specialises in different areas, so talking to those who are strong in certain areas where there is action that day, or where I am worried about something, can be really helpful.
I like to think that there is no such thing as an ‘older’ or ‘younger’ guy on the team, as we are all learning together every day. I enjoy working with those who are a bit newer to the industry as they provide interesting ideas and are always prepared to challenge me. In a job like this you want to surround yourself with the kind of people who will point out the weaknesses in any argument.
I have always found it fascinating going along with our analysts to visit companies. We have some great analysts at M&G and I particularly enjoy watching them question company management. Often management will try to avoid certain questions, but the good analysts keep on asking if they don’t get their answers, and watching them wheedle the information out of company management is always a treat.
I find it really interesting when people in a given industry are challenged by those outside that industry. It can show how well people know their own businesses and, occasionally, can highlight where they are not quite being truthful.
This kind of challenge can be particularly interesting during the more difficult times, for example during the financial crisis. I used to enjoy challenging people in this way when I was an analyst, but I mostly leave it to the specialists now.
Career challenges
The financial crisis was probably the biggest challenge in my career so far. We were in unprecedented times and the challenge was to constantly keep thinking about things, reevaluating and looking forward to see what would happen next. In fact, our portfolios did very well and the temptation, having had some good performance, was to close out all our positions and take everything neutral but that wouldn’t have been the best thing to do for our clients. As every month passed we thought that things had got as bad as they were going to get, but of course most of the time they hadn’t. It was difficult but you had to keep forcing yourself to look forwards at what could come next and not back at what had been.
Some of my hardest moments have come more recently, as bond yields headed towards zero. As a value investor, this made life difficult as the opportunity to find mispricing in the market narrowed. However, after navigating through that tricky period, we now find ourselves back in a situation where fixed income has an attractive entry point in my opinion, and we can take advantage of dispersion in the markets.
The other big thing to have really changed in my two decades here at M&G is that some conversations have moved from the theoretical to the practical.
In earlier days, when yields were at 3%, we talked about how they could theoretically go to 0%, and what we should do to protect ourselves in case that happened. Nowadays, we know from experience that yields can go to zero. So we also know that the upside is real not just theoretical.
The value of investments will fluctuate, which will cause prices to fall as well as rise and you may not get back the original amount you invested. Past performance is not a guide to future performance.
