In every professional career, ‘chance' plays a key role. The importance of being in the right place at the right time cannot be exaggerated.
The asset management profession is a good illustration of this: someone starting to work in this profession in the mid-sixties will have spent a large part of their career seeing equity markets stand still. By the middle of 1982, the S&P 500 index stood at practically the same level as at the beginning of 1966. Since inflation was very high in the 1970s, an investment in that index would have generated a very pronounced loss of purchasing power. During the same period, interest rates rose sharply. From 4.5% in 1966, the United States 10-year interest rate climbed to over 13% at the beginning of the 1980s. It is hard for an asset manager to generate good absolute returns against such a headwind.
On the other hand, if the same asset manager had begun their professional career in 1982, the headwind would have been transformed to a very strong tailwind. Between mid-1982 and the start of 2000, the S&P 500 increased 15-fold, from 100 to over 1,500.
Over the same period, the 10-year interest rate dropped from over 13% to below 5%. Difficult not to make money in such circumstances. Since 2000, the equity markets have been through challenging periods, but overall have continued to advance, witness the US market which now stands at double its early-2000 level. As for interest rates, they have quite simply practically disappeared and even become negative in many cases. But although the environment of the last 20 years has undeniably been more complicated than the previous two decades, it has nonetheless remained favourable for asset management.
A changing environment
The financial markets' rise in recent dec-ades has been based on an unusual com-bination of factors, which primarily include the following:
- independence of the central banks,
- decline in inflation,
- globalisation of the world's economy,
- demographic factors encouraging an increase in savings and hence demand for financial products,
- a relatively stable political order marked by US hegemony.
These trends have helped to drive down interest rates (helpful not only to bonds but also to equities due to lower financing costs for companies and an increase in valuation multiples) and boost corporate profit margins.
The concept of recency bias generally refers to the tendency among human beings of being more readily able to remember the most recent information they have come across. This bias often leads them to think that what has been true in the recent past
Guy Wagner is managing director, BLI - Banquie de Luxembourg Investments