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We are just a few days away from launching the Euro Equity Fund and the most common question that I am being asked is ‘what return should we expect?’ For an equity fund there is no straightforward answer. Markets may surprise both in the positive and the negative and the past is not a guarantee etc… So what I will do is present a few arguments that give me confidence in what we are doing and why the timing is right for investing in equities.
An investor in European equities would have made circa 15% since last December and circa 31% since December 2011. That represents a gain of around 30% in 2 years if you were a boring European value investor like myself. I am not implying that I expect 15% return each year going forward, but I will definitely be aiming at that mark. Below 10% would be disappointing but not tragic.
The 2-year ride described above was not always pleasant and it was definitely bumpy. At one point markets retreated more than 20% from a peak and cold nerves are necessary not to bail out from these situations. The bumpy ride is expected to be less bumpy going forwards; still it will be bumpy as not all is well in global markets. Having said that, the best time to invest is when the economic environment has a potential to improve. It is fair to say that now is the time when the global economy seems to the crossing the road from 'crisis mode' to 'optimism mode'. Regarding nerves , leave that to us, we are paid solely for that.
Finally, back in June we had started a trail with an internal portfolio to mimic the fund. Considering that most of the time we had more then half the holdings in cash a 6% return in 4 months was not bad. Now that we are observing more determined shifts by a number of investment managers into equities we are more optimistic about the rest of the year.
I believe that the 40 year bond era may have reached its climax and while bonds will and should remain the dominant holding in any balanced portfolio, it will be equities that will provide the largest chunk of return in the next few years. That is why Calamatta Cuschieri are being pro-active and offering typical fixed income clients the chance to benefit from what appears to be the most promising investment opportunity going forward.
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