The major lesson from 2021 has been that agility and adaptability are necessary responses to turbulent times. One cannot invest in a vacuum and ignore context and the environment. A number of unexpected events occurred in the past year and deciphering the noise from real risks has been critical in outperforming the market.
Fundamental investing is a longer-term approach that relies on the principle that a company’s share price will eventually reflect its intrinsic value. As institutional investors, selecting companies that are trading at a discount to this value ensures that we protect our clients’ capital and compound their wealth over time through many business cycles. Naturally, markets ebb and flow with different investing styles rewarded over different periods. A successful investment strategy however, requires flexibility and an open mind to maximise the underlying work performed. This approach was especially helpful for us this year as it seemed as though different cycles took place in a matter of months, not years.
The year was expected to be a return to normality, following an unprecedented 2020. As vaccine rollouts made progress worldwide, many investors were focused on the easing of lockdown restrictions and a great reopening to accelerate global economic growth. Instead, 2021 was characterised by unexpected challenges and further uncertainty. From the COVID-19 Delta variant to supply chain constraints and the looming tightening of monetary policy, the outlook for the global economy remains opaque. At the same time, US equity markets continue to push towards record levels. This uncertain outlook has created both challenges and opportunities. An investing style focused on quality was challenged as many high-quality companies were priced for perfection. Any negative deviation from past performance caused a sharp decline in share prices. An investment strategy that ignored the resources sector would have neglected the real risks first signalled by commodity markets, and the opportunities presented by rising prices.
The global macroeconomic environment has been dynamic. Acknowledging and understanding the elements of this unique environment has led to some great opportunities.
At the time of writing, we are heading into the last month of the year, and the uncertainty that has come to characterise 2021 remains. It seems as though central banks are moving to tighten their monetary policy amidst credible concerns regarding inflation. These conditions have sometimes been trying, but these turbulent times can be capitalised on by using rigorous fundamental work and staying agile.