A large part of the investment strategy for the Coleman Street funds in recent years has been to find what we think are great businesses available at fair prices and to own these assets for the long term. We think that markets are inefficient and that even great businesses go through periods of under valuation and over valuation; our aspiration is to buy shares during the former and hold onto them during the latter. We reflect on one of our learnings from 2022 as being that, even in ‘running our winners’ we should not allow what we believe to be overvalued assets to make up too large of a proportion of the fund in any geography or asset class. When we do this, a sharp swing into undervalued territory for a number of businesses at one time can cause meaningful pain at the portfolio level.
We remain ‘til death do us part’ investors and we continue to think that any short-term trading efforts will add little value to performance. However, in the face of a volatile outlook, we intend to be more aware of valuation at both the single asset and the portfolio level and believe that it may be the case that extremes of the latter might prompt a review in our exposure to the former.
Unfortunately, this was not the only cause for reflection in 2021 and our asset allocation calls were a disappointing headwind. We retained a small but costly underweight position to the North American market that delivered a near 27% return over the year versus the MSCI World that returned just over 20%. And we held zero exposure to the best performing market of 2021 – of course Mongolia’s infamous MSE Top 20 (which returned 130% by the way). We think that asset allocation performance is driven mostly by uncertain and unpredictable macroeconomic factors and it is for this reason that we do not try to generate significant returns from it as part of our investment process.
It is our process-driven approach that supports what we think is an important skill in the execution of our strategy and one that has certainly been tested in 2021; emotional resilience. We do not think that emotional resilience equates to a dogmatic or blinkered approached but we do think it means being able to disregard groupthink, false information and emotional reactions in order to focus on a rational, evidence-based approach to good decision making.
There are some obvious examples of how this translates to our investment process and our interactions with investors. We believe that it requires emotional resilience to ignore the widely accepted but simplistic definition of volatility in and of itself as risk. We believe that it requires emotional resilience to remember that even though inflation and interest rates have not consistently risen during any of our investing lifetimes it does not mean that they will not ever again. And we believe it requires emotional resilience to think profoundly about what sustainable investing means and how we as investors can and should act in the best interests of capitalism’s vast and diverse stakeholders.
This emotional resilience will be key to generating long term outperformance in the investment markets. We must be prepared to analyse vast amounts of information, to think about that information deeply, to formulate our own opinions about what that information means but also to be prepared to change and adapt our opinion if re-running that process so suggests.
Whilst the long term returns on the Coleman Street Funds remain pleasing and the double digit percentage that has been achieved in 2021 is not to be sniffed at, we are of course disappointed to have failed to keep up entirely across all funds with the stellar returns on offer by our benchmark over the year. It is not a good enough excuse to say that the majority of funds did not either.
Our strategy will go through periods of underperformance and we will continue to make mistakes, but we will focus on learning from those mistakes, improving and evolving our process and practicing emotional resilience to execute this successfully. We think that if we do that, the results in the years ahead will continue to be pleasing.
James Godrich, Fund Manager
James is the manager of the Coleman Street Investment Service
The value of securities and their income can fall as well as rise. Past performance should not be seen as an indication of future results. All views expressed are those of the author and should not be considered a recommendation or solicitation to buy or sell any products or securities.
