Recency Bias
Recency bias is our tendency to expect whatever we have recently encountered to persist in the future. When things are going well, we tend to expect them to continue going well. The opposite is also true.
Right now, with markets having been so strong for so long, investors’ behavioural bias is to expect things to continue on their current course.
During these periods investors tend to ignore fundamental value and the need to re-balance their portfolios from an asset allocation perspective. Equity markets are forever cyclical. There are long-periods of strong results which tend to be followed by poor returns and vice-versa.
Recency bias can be a big reason that investors tend buy at highs, and sell at lows. It blinds investors to the fact that companies’ margins and market multiples tend to revert back towards long-term averages over time.
How Is This Relevant Today?
Americans’ expectations that stocks will keep rising are at a 17-year high. They haven’t been this bullish since January 2000.
This is at a time when the markets have had a significant rally from the market lows in 2009.
On most measures the US Market, as with many global markets, are trading at peak historical levels if you exclude the technology bubble of 2000. This can be observed from the next two charts:
This is also at a time when volatility is close to an all time low reflecting high levels of complacency by investors.
The easy money made in stock markets is invariably in those which later prove to have been overvalued. There is every chance that in the immediate future stock markets will trend higher. However, based on the above charts, as markets push higher there is an increasing likelihood that the markets will mean revert and investors may well face significant losses.
Downside Protection
With the increasing risks of a significant market fall, as a result of Recency Bias and high valuations, greater caution is required. Insync have implemented an index put protection strategy on over 50% of the portfolio to cushion the losses in the event of a sharp and significant fall in equity markets.
Fund Performance
The Global Titans Fund posted a gain of 3.49%, after the cost of protection, for the quarter ending 31st March 2017 versus the benchmark which returned 1.38%. Top performers included BAT, Unilever, Oracle, Visa and Medtronics. Conversely Zoetis, McDonald’s and Gilead Sciences detracted from the quarterly performance.
New opportunities we identified during the quarter included TE Connectivity, London Stock Exchange and Amadeus IT. The major sales during the quarter were Roche and Gilead Sciences. Details of the rationale for the buys and sells can be found in the attached document.
Read more on The Global Titans Fund’s performance in the Quarterly Commentary March 2017.