Evercore Pan Asset

Just as we feared, 2011 is proving unrewarding for most investors. Days of gloom and falling markets alternate with days of enthusiasm and love of risks. Bulls and bears are locked in a never ending battle. It’s like watching a never ending arm wrestle, with first one side then the other getting closer to victory only to be dashed again.

The bulls keep reminding us that the world economy is still growing. The western banks may be weak, but they seem now to be supported by governments and under pressure to be stronger by regulators. The East may be combating inflation and raising rates, but it’s still growing at a healthy pace and may not plunge off a monetary cliff anytime soon. Profits and dividends are advancing in most locations. Western interest rates are so low, and bonds in the better jurisdictions far from generous, so what is there to dislike about shares?

The bears say there is plenty to worry about. The west may be in for years of slow growth, as it seeks to crawl out from under the mountains of debt companies, consumers and governments have piled up. There could still be an accident in the western banking system. The sovereign debt crisis has just had another phase, with the effective default on Greek debt bringing the reality into the Eurozone. The eastern countries are applying the brakes so hard their economies could skid into the economic ditch. What are the prospects for the USA now quantitative easing is out of the way?

If you look at the figures for the year to date you can see there have not been many markets that have provided a decent return. Many share markets and bond markets are hovering around the zero. You could have lost more than 10% by being in Japan from the beginning of the year, or in India. Commodities have been volatile, but overall have offered little joy. A prudent manager has been able to avoid heavy losses, but finds it difficult to make good returns.

These are the conditions when you might hope good active management comes into its own. There have been some success stories, but the overall results from those most active of funds, hedge funds, have been disappointing. Funds which operate on the basis of following trends, often with mathematical models and computer help with trading positions, have found times especially tough. Trends do not last long enough. There is the perpetual danger of being whipsawed. By the time the fund picks up the bear trend and has gone short, the market shoots upwards. By the time the fund is long or geared for the bull move, the market dips.

We see the current period as one to endure, trying to avoid the areas of substantial loss. It seems likely that in due course bond holders will want higher returns for their pains, whilst shares in faster growing parts of the world will at some stage be discounting the slowdown to tackle inflation and will start to do well again. We think real assets are the best longer term investments for many investors, and going to the places where growth will be fastest is likely to prove more rewarding as the west edges its way through the long shadows of the Credit Crunch.

As published in Investment Week