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How easy is it to beat the market?

25 January 2018 | Portfolio construction

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Leo Schulz: How easy is it to beat the market? Many investors are tempted by tactical asset allocation, the practice of shifting a portfolio's weighting as the outlook chops and changes. But how easy is it to get it right?

My name is Leo Schulz. I have with me Neil Cowell, head of UK Intermediary Distribution at Vanguard Europe.

Neil, the chart we're looking at here shows the performance of a number of core asset classes over the past 10 years. We have global equities, UK equities, global bonds, UK bonds, we have got the Morningstar moderate allocation peer group, and we have got Vanguard LifeStrategy 60% Equity Fund. There is a lot of volatility in that period, isn't there, Neil?

Neil Cowell: Yes, there is. I think the key message, Leo, from this chart is that when you look at this market volatility, you would think that there would have been ample opportunity for tactical asset managers to have added value in such volatile markets.

Leo Schulz: So we have the volatility, for example, of the great financial crisis, the European sovereign debt crisis. What is the evidence that managers managed to get value out of that volatility, Neil?

Neil Cowell: Well, again, looking at this chart, the evidence would suggest that that is very difficult. The blue line here shows the peer group average, and very clearly demonstrates that adding value has been very difficult indeed.

Leo Schulz: So what are a couple of recent examples, Neil?

Neil Cowell: I think the obvious example is Brexit, where very few people, I think, predicted the outcome of Brexit –

Leo Schulz: – of the actual vote itself.

Neil Cowell: Of the actual vote itself. And then, of course, when the result came in very few people expected there to be a rally in UK equities, which is what we have seen. Another example is the US election where, again, questionable whether people would have expected that outcome, but definitely the rally that we have seen in US equities since that time wasn't expected.

Leo Schulz: So Neil, these were big events with very sharp and prominent movements in the market, why is it so difficult to get this right?

Neil Cowell: From a tactical asset manager's perspective, it is not only a question of knowing when to trade, that is certainly difficult enough, but there are many other factors that a tactical asset manager has to get right. So, for example, how much do they trade? How long do they hold that different position for? What's the trigger to revert? What are the costs associated with that trade? All of these are critical factors that a tactical asset manager has to get right if they are to add value, Leo.

Leo Schulz: So it's hard to see the future as everybody knows. There's a lot of complexity around the decision, so what's the alternative, Neil?

Neil Cowell: I think the alternative is strategic asset allocation, which we advocate. We're not saying, to be very clear, that tactical asset allocation can't add value. What we are saying is that the evidence is very clear, that it is difficult to do, and that the message is that for the majority of investors, for the majority of time, rather than trying to beat markets, they would be far better off letting the market do the work for them.

Leo Schulz: As interesting as it is to talk about the prospects of different asset classes in relation to current conditions, we think the simple way to get the market onside is through a regularly rebalanced, well-diversified portfolio with assets allocated strategically. Neil Cowell, thank you very much.

Neil Cowell: Leo, thank you.

Important information:

This video is directed at professional investors and should not be distributed to, or relied upon by retail investors.

This video is designed only for use by, and is directed only at persons resident in, the UK. It is for educational purposes only.

The value of investments, and the income from them, may fall or rise and investors may get back less than they invested. Past performance is not a reliable indicator of future results.

The material contained in this video is not to be regarded as an offer to buy or sell or the solicitation of any offer to buy or sell securities in any jurisdiction where such an offer or solicitation is against the law, or to anyone to whom it is unlawful to make such an offer or solicitation, or if the person making the offer or solicitation is not qualified to do so.

The information on this video does not constitute legal, tax, or investment advice. You must not, therefore, rely on the content of this presentation when making any investment decisions.

The opinions expressed in this video are those of individual speakers and may not be representative of Vanguard Asset Management, Limited.

Issued by Vanguard Asset Management, Limited which is authorised and regulated in the UK by the Financial Conduct Authority.

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