At a glance
- Using valuations as part of our disciplined approach to identify attractive areas of the market is instrumental in shaping our investment decisions.
- Valuations serve as a compass, directing our attention towards hard facts and away from the distracting market noise.
- Practicing patience and discipline ensures that we only act upon opportunities when valuations are at extreme levels.
In this update, I want to discuss an important principle that guides how we invest: valuations. Valuations are a way to help us ignore the hype and to identify areas of the market that truly represent good value.
To determine what ‘good value’ looks like, we use data like earnings, market trends and the potential for future growth. From this, we can calculate a valuation, or a reasonable estimate of what an investment is truly worth. This can help us to spot when an asset is selling for more or less than its true value.
Don’t believe the hype, it’s valuation that matter.
Skimming today’s newspapers or scrolling through social media, you’re bound to encounter headlines or pundits promoting the latest investment promising high returns.
It’s essential to recognise that such offers, compelling though they may appear, often play on our ‘fear of missing out’, nudging us towards following new trends or doubting our own investment choices.
Cryptocurrencies are emblematic of this. While some investors have experienced meteoric gains, the extreme volatility and risk of total capital loss make them feel highly speculative. Diving into something like this without really understanding the underlying valuations, or potential volatility, feels a bit like rolling the dice. So much depends on market whims.
We don’t speculate, we evaluate
Existing investors will be familiar with our select monitor change process, where we scour the globe for the best investment managers. This is aligned with our asset allocation process, which uses valuations to inform decision making on our Growth Portfolios and fund-of-fund solutions, InRetirement and Polaris.
We believe that these processes, when combined with our global, long-term approach to diversification, hold the key to long term success. Valuations represent how much a company or asset should realistically be priced at in the market. By understanding this, we can determine if the current price is high or low, and then decide whether to buy, sell, or hold. Our process will identify extremes in valuations but we always remain disciplined about the opportunities we invest in and those we choose to ignore.
When it comes to our ready-made investment portfolios, it’s important to concentrate on the valuations of broader categories like sectors, regions, or entire asset classes. This wide-angle view allows us to identify whole areas of the market that have deviated from their true value and exploit any potential mispricing opportunities.
For example, during periods when stock market valuations have risen sharply, equities, or company shares, can become relatively less attractive compared to other asset classes. In this situation, we may recommend adjusting our portfolios to increase exposure to assets with more favourable valuations, such as bonds or alternative investments.
By dialling up or down the weightings of asset classes based on their valuations, we can respond to changing market conditions. It’s in this medium-term asset allocation process that new investment opportunities can be found, and also where portfolio risk is managed. However, it’s important to effectively apply our in-depth analysis and market knowledge, in order to construct resilient portfolios.
When an asset class presents an extreme valuation – that is, when it is significantly undervalued or overvalued relative to its historical norms – we will consider increasing or decreasing our investment in that area.
Why being patient is important
Historically, investment strategies that prioritise valuations have been shown to outperform speculative approaches over a period of five years or more.
However, attractive valuations are not always evident from the outset; it often takes considerable time for the market to realise it.
This is why being patient is so important and means taking steps to avoid the pitfalls of acting on gut instincts. It enables our team to keep biases in check and hold a medium-term view. It also helps to stay focused on the basics, like whether an area of the market is overvalued or undervalued.
We’re bracing ourselves for more distractions this year. Amongst the noise, pre-election manoeuvres and manifesto pledges may spark speculation around which stocks or asset classes will come out on top. Staying patient and making disciplined decisions based on sound analysis, like valuations, will be more important than ever.
Past performance is not indicative of future results.
The value of an investment with St. James’s Place will be directly linked to the performance of the funds selected and may fall as well as rise. You may get back less than the amount invested.
SJP Approved 16/04/2024