Only if We Let It Be
As one year ends and the next begins, it is important to ask whether the past predicts the future. Ironically, the investment management industry is built upon a widely disclosed truism: “PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE PERFORMANCE”. Warnings of this nature accompany every investment product.
While the past does not predict the future, actions taken in ignorance of the past can be risky, and dare I say, imprudent. In my last post I focused on inflation, however, the concern goes way beyond inflation.
Floyd Norris reviews over 60 years of bond market history, Reading Pessimism in the Market for Bonds, and without resorting to overwhelmingly sophisticated analysis (an analysis that even I, a mere lawyer can follow) identifies 30 year swings in the bond market. From the the bear market of 1946-1981 and the bull market from 1981- present, he anticipates the start of another 30 year long grinding bear market in bonds.
Given this trend, the mere flip of the calendar page from 2012 to 2013 should give us pause. If this is not sufficient to cause some hesitation and concern, look to the historically meager interest rates being paid to bondholders. At some point, and probably some time sooner rather than later, the deluge of investment into bonds will reverse its course. The reverse tidal wave could be devastating to investment portfolios of all stripes. .
While the practical implications of a down bond market concern me, I am even more concerned about whether the investment managers and other decision making fiduciaries are up to the task of making the significant intellectual paradigm shift from bull market to bear market.
Within Norris’ column, Michael Gavin, the head of U.S. asset allocation for Barclasys, identifies a fact which I have also addressed before… with great concern. Most investment fiduciaries have never operated in a bear bond market. The skills that they have honed and perfected (whether in equities, fixed income or alternatives) are all products of a 30 year bull market in bonds.
What happens when that market changes, fundamentally? Not a mere blip such as 1994 which saw a short-term uptick in interest rates, only to be followed by the overwhelming bull market trend which has lasted almost another 20 years, but the real McCoy; a long 30 year trend of rising interest rates and falling bond prices.
Let me be clear. I am not suggesting that I have the answers. However, when I turn to other investment fiduciaries, I am not looking for the same re-heated, cliched solutions of the last 30 years. Instead, I am looking for managers and advisors who are able to look at the past 60+ years of investment management trends and investment philosophies and extract principles and lessons which are applicable today.
And yet, it is not all about the past. The present presents challenges and a new world. In 1982 as the bond market started its ascent, baby boomers were hitting the work force and engaged in their own ascent up the corporate ladder. Today, retirement looms, pension savings must be accessed thereby putting even further downward pressure on the bond market. Debt explodes everywhere: invididuals, corporations and sovereign nations. These are merely a few of the most obvious challenges.
For the past not to be prologue, I am keeping my eyes open for the investment managers who know their history, are fluent with the challenges of the present, and most importantly, have fashioned an investment approach with a full understanding of both.