Investment Desk Bulletin

15 March 2018

Consistent Equity Investing

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By Roger Jones

In this week’s IDB, Roger Jones discusses the key tenants of London & Capital’s STAR Equity strategy. The high quality and consistent approach of STAR is crucial in achieving our long-term objective of wealth maximisation. The high quality and consistent approach of STAR is crucial in achieving our long-term objective of wealth maximisation.

London & Capital’s STAR approach is focused on minimising drawdowns and history has shown that strategies of this type have delivered superior returns relative to benchmarks over the long-term. There will however be challenging points in the market cycle, where a low volatility approach will underperform the wider market, albeit still with positive returns.

It is important to strike the right balance between consistency and pragmatism. STAR’s ability to remain flexible is evident in the rotation between sectors over the past two years, adapting to favourable economic conditions by increasing information technology and industrial sector exposure.

Throughout the change in sector focus, the process of equity selection remains unchanged. STAR stocks are of a high-quality, with visibility, consistency and certainty in their earnings. We favour low leverage to avoid destructive debt spirals, which often result in dividend cuts that damage compounded returns.

The STAR process screens for an appropriate amount of market liquidity in the stocks selected, which helps to provide flexibility in times of market stress. Liquidity is an often forgotten asset market risk, until volatility increases.

The growth outlook is supportive of further momentum in the equity market, however, there are reasons to remain cautious. Market leadership has narrowed and share prices have moved ahead of earnings, both suggesting exuberance in the market. A close eye must also be kept on volatility as a three month moving average of the (VIX) points to a change in the risk environment.

In summary, consistency is vital for longer term wealth maximisation as provided in London & Capital’s STAR approach, which looks through the short term noise, participates with rising markets and provides much more resilience in time of prolonged market stress. Returns are delivered through price appreciation and dividend income, however, the Longer Term Absolute Total Return, is the single most important factor.