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LGT Investorama: Only when the tide goes out do you discover who’s been swimming naked

July 4, 2019

LGT Capital Partners recently celebrated its 20th anniversary. Most of the time, anniversaries provide a good occasion to look back. Remember: 20 years ago, the impending computer crash - the "Millennium Bug" - kept the public in suspense during the transition to the next millennium. There were even voices predicting apocalyptic scenarios. There are parallels between the prophecies of that time and today's mood among investors. A large number of investors also believe that we are approaching the end of the (market-)cycle.

A feature of late-cycle markets is that recession scares recur. Another has been brewing and has its origins in the growing breach between America and China over trade. At the beginning of May America stepped up its tariffs on Chinese imports and opened a new front in the dispute by requiring American firms wishing to supply Huawei, to seek licenses. Markets have become choppier and have not helped to reassure investors. Many of them remain unsettled.

The greater the level of uncertainty, the more we tend to retreat on proven concepts, taking refuge in trusted quality. Quality is reflected in investment portfolios by positioning them to perform well through the entire cycle. With a focus on defensive quality, an investment portfolio should be able to weather turbulent periods and, ultimately, stand the test of time. Benjamin Graham recognized back in the 1930s that the biggest losses are not generated by buying quality at a high price, but rather by acquiring low quality at seemingly favorable prices. The most successful investors are those who know how to avoid extended periods of losses. Consider this: to recover a price loss of 50%, the value of the asset has to subsequently rise by 100%. Further, most of you will agree that the pain of losses is greater than the thrill of gains.

Which investment solutions generating a suitable return can an asset manager now recommend with a clear conscience to investors looking for security? High quality stocks are an interesting investment opportunity. At LGT Capital Partners, we seek out companies with solid balance sheets and excellent management in less cyclical businesses and also include out-of-favor sectors. Our universe of quality companies has thus a defensive aspect to it, with an overall lower sensitivity to the broad market. Further, the integration of environmental, social and governance (ESG) factors are an essential part in selecting top quality investments. Such a portfolio might not win first place when markets rally furiously, but over a full cycle, it should prove to be the better investment choice. For it is in the ensuing hard times that any investment portfolio will have to prove itself and avoid unrecoverable losses. Or to phrase it with the words of Graham’s arguably most famous disciple, Warren Buffett, “Only when the tide goes out do you discover who’s been swimming naked.”

For some time now we have been managing a significant portion of our own assets on the basis of the quality approach described above. You can take advantage of this unique alignment of interests. We would be pleased to show you the benefits of investing in these quality investment solutions.

Marcel Dillier

Co-Head Key Account Management

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