Managing emotions in investment: The importance of objectivity

After a challenging period last year, our investment strategy has delivered strong results during 2024. Despite short-term headwinds, as our investment trust holdings went to a temporary discount due to rising interest rates, we held firm in our conviction that the fundamentals of our positions remained solid. As a result, the most recent quarter has been particularly strong, with our portfolios posting a significant improvement in relative performance compared to peers.

This resurgence was driven by several key factors. The core holdings we believed in – despite market sentiment turning against them – have now shown their true value. Our equity selection has outperformed, thanks to a focus on high-quality companies with solid fundamentals. Additionally, our active duration management in fixed income has further enhanced overall performance. These results underscore the importance of maintaining objectivity during turbulent times, ensuring that emotional responses don’t interfere with sound investment strategies.

While the market often throws challenges our way, this experience highlights a fundamental truth: if the underlying assets are strong and the investment strategy remains valid, short-term volatility should not deter long-term success. This is an important reminder for investors. At times, the temptation to act on emotions – driven by market noise or the desire to match peers’ short-term performance – can be overwhelming. However, our recent experience reinforces that by sticking to our well-founded strategies, we position ourselves and our clients to benefit when market conditions align with our analysis.

Embracing short-term pain for long-term gain

The strong performance we’ve recently enjoyed didn’t come without a period of difficulty. Over the previous year, rising interest rates led to a temporary discount in some of our investment trust holdings, impacting our relative performance. Many investors, faced with such headwinds, might have been tempted to abandon those positions in favour of more immediate gains elsewhere. But as wealth managers, we understood that the market’s short-term view didn’t reflect the strength of the underlying assets. The net asset value (NAV) of those trusts remained robust, even though market sentiment had shifted.

Our patience paid off. As market conditions stabilised and sentiment began to recover, these trusts saw their discounts narrow, allowing their value to be realised. This turnaround in performance is a reminder of why it’s so important to stick to a well-researched investment strategy, even when external conditions create noise. Emotional decisions made during turbulent periods often lead to missed opportunities, while those who remain disciplined can reap the rewards when the market recognises the true value of their holdings.

Good equity selection and duration management deliver value

Our recent success wasn’t limited to a recovery in investment trusts. Another major contributor to our strong performance has been our thoughtful selection of high-quality equities and proactive management of fixed-income exposure.

In the equity space, we focused on companies with strong balance sheets, consistent earnings growth, and the resilience to withstand market volatility. While broader markets experienced turbulence, these quality names helped our portfolios weather the storm. As interest rates are now beginning to fall, our recently increased positions in small-caps have been key to driving recent gains, benefiting from improved borrowing conditions.

On the fixed-income side, our duration management strategy played a vital role in adding value. With interest rates rising, we positioned our fixed-income portfolios with longer duration assets, which subsequently gained

significantly as the market anticipated interest rate cuts. This contributed to the depreciation of the US dollar, benefiting our recent allocation to emerging market debt. Additionally, credit markets performed well, with better economic data tightening spreads, and our recent addition to US high yield bonds added further value.

Emotional discipline in a volatile market

During periods of underperformance, it’s natural for emotions to come into play. Investors – and even seasoned wealth managers – can feel the pressure to react, especially when relative performance lags behind peers. But this is where discipline and objectivity become most important. Rather than reacting to short-term fluctuations, our focus remained on the fundamentals of our positions and the long-term goals of our clients.

The short-term volatility that drove investment trusts to a discount was exactly that – short-term. The NAVs were strong, and the underlying assets remained unaffected by the temporary market sentiment. Staying the course allowed us to not only avoid crystallising losses but also position our clients to benefit when market sentiment shifted in our favour.

In contrast, emotional decision-making during such periods can lead to suboptimal outcomes. Investors who panic in the face of market turbulence may sell at the wrong time, locking in losses or missing out on future gains. Staying focused on the long-term strategy requires patience, but it also provides the best opportunity for capturing the full value of the underlying assets over time.

Timing of returns: A lesson in patience

As wealth managers, one of the most difficult aspects of our role is managing expectations around the timing of returns. It’s tempting to believe that every well-founded investment decision will yield immediate results. But in reality, the market doesn’t operate on our schedule. Market cycles, sentiment shifts, and macroeconomic factors all play a role in determining when returns will materialise.

Our recent experience with both investment trusts and equities has demonstrated this point clearly. The timing of returns was not something we could control. All we could do was ensure that we had selected strong underlying assets, maintained a balanced approach to risk, and remained patient as the market worked through its natural cycles. The eventual recovery and strong relative performance we’re now seeing is a testament to the importance of preparation and patience.

Navigating the market with patience and discipline

As we look back on the past year and review our recent performance, one thing becomes clear: successful investing requires a balance of conviction, discipline, and patience. The volatility we experienced was challenging, but it was also an opportunity to reinforce our core investment principles.

The strong performance of the last quarter is a testament to the importance of sticking to a well-founded investment strategy, even when market conditions are difficult. By remaining focused on long-term value and resisting the urge to react to short-term fluctuations, we have positioned our clients’ portfolios to capture significant returns as market conditions improved.

In wealth management, we can’t control the timing of market returns, but we can control our preparation, discipline, and commitment to sound strategies. With these tools, we can continue to deliver value for our clients through both calm and stormy market environments

Strong Gains in Equities and Fixed Income
Senior Investment Specialist, Rebecca Cretney shares highlights of the market performance for Q3 2024 and future investment opportunities.