Returns have been eroded by the ongoing spate of asset support conducted by central banks since the financial crisis. The idea of the global economy weaning itself off measures such as quantitative easing looks ridiculous, with central bankers willing to step in the moment something goes wrong. Investors also expect it. The result of these actions has been to push up valuations of assets. There is a cost to that support and that is lower returns and increased volatility.
One thing you can do is to try and trade that volatility – but good luck. These days unexpected events, like snap elections, make it difficult to build a repeatable process around such an approach. Instead, the nature of sustainable income over time, the power of compounding dividends, could provide a resilient and significant impact to one’s total return, which in the long run, leads to greater asymmetry in returns. Stability of returns is important to clients and in a world of risk and high valuations, it is ever more important.
However, many growth-oriented managers are still seeking the big story – the next Amazon or Apple. They have a fear of missing out (FOMO). But the ability to pick one particular fish out of the sea is difficult.
I see investing more like Michelangelo who famously, when asked about his art, said it’s what you take away that matters. We take a similar view: take away the statistically unattractive stocks. That’s what the discipline of income does – it narrows down the bucket and forces us to be patient.
Nick Clay – Newton, a BNY Mellon company