In our role as investment advisors and portfolio managers, we have seen our share of events, including election cycles, that can increase market volatility. If one listens to pundits on national television, one of these events happens every day…joking aside, there are often important events that shape markets. It may be elections, central bank rate decisions, changes in fiscal policy. regulatory changes for industries, earnings results from companies, GDP results from countries, etc. The list goes on and on. Our approach to managing money before, during, and after any one of these events can significantly impact our clients’ end results.
Many investors, whether individuals or professionals, attempt to tactically managed their investment exposure based on the their predictions and/or emotions concerning future events. One example would be suggesting that a client broadly buy or sell equities before an election based on a perceived outcome. While this can be tempting from an emotional standpoint, it is our belief that the best way to manage your investments during these events is to maintain the approach you would take before and after the crisis. After all, the client’s long-term goals and financial situation are typically not changing.
Timing the market, whether based on emotions or predictions, is a very difficult task. Successful market timing requires being correct both in thesis and timeframe. Market timing also generally means having a meaningful allocation to cash at various points in time which can cause a substantial drag on portfolio returns. One way to view success or failure in this attempt is to look at actual investor returns versus underlying investment returns. This analysis aims to compare actual investor outcomes based on their behavior versus fund returns. Thankfully, Morningstar provides this comparison on an annual basis. While not an exact science, Morningstar looks at the published returns of a fund, versus the return of a hypothetical dollar invested in the fund by estimating the time frame invested based on fund flows. This provides a reasonable measure of whether investors (individual and institutional) time their investments well. The answer is generally “no” as shown by the graph on the right. While investors did do slightly better in the Allocation category, they did worse in Equity, Fixed Income and Alternative categories.
As a firm, Maple Capital Management conducts bottom up research based on our analysis of individual companies. We avoid broad based market timing and focus on the long-term success of actual companies. We evaluate individual companies based on many factors including their management teams, competitive landscape, balance sheets, and financial results. This does not mean that we stick our head in the sand when it comes to macroeconomic or broader events. We strive to invest in businesses for the business cycle. When reviewing company fundamentals and financial results for a bank as an example, the broader credit and interest rate environment plays a big role in how we view the competitive positioning and relative attractiveness of their business model within the industry or sector.
When it comes to events like the election (or really anything else for that matter), the best plan is to have a plan and stick with it. If it feels uncomfortable to stick with the plan, the answer may just be to examine the plan instead of how to invest in a particular environment. We take our role as a money manager and fiduciary very seriously and encourage these types of discussions with our clients. After all, having a plan you can stick with through thick and thin is arguably one of the most important aspects of financial success.
Maple Capital Management, Inc. (MCM) is an independent SEC Registered Investment Advisor with offices in Montpelier, Vermont and Atlanta, Georgia. This commentary reflects the views of MCM and should not be considered to be investment or financial advice. MCM does not warranty these views and will not update this communication after the date of publication. Any mention of specific securities is done for illustrative purposes and the securities mentioned may or may not be held in client accounts. No assumption or assurance should be taken that securities mentioned will be safe or profitable investments. For further information, please contact Steven Killoran at 1-802-229-2838 or at [email protected]. For further information about Maple Capital, including a copy of our informational brochure, please visit our website at www.maplecapital.com.