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Diary of a fund manager - Messes, Problems and Puzzles - 21.01.19

David Miller, Investment Director, Quilter Cheviot

This week follows up on previous Diaries about what is behind the post-Christmas rally, some news from the Algarve, and guidance on problem solving.

Last week markets continued to unwind the December hissy fit with equities moving higher, safe haven bonds lower and gold unchanged. Sterling strengthened against the euro and the dollar was weak against both. Interest rate forecasts and trade war rhetoric continued to moderate with only the impact of the US government shut down on economic growth and, for those of us based in the UK, Brexit causing concern. Now for the results season.

On the political front, guerrilla warfare has broken out between The White House and Congress, and Brexit staggers on. Sterling responded to the Government’s defeat on Tuesday by going up and the vote of no confidence was, in market terms, a non-event. The consensus is suggesting that the chances of a ‘no deal’ or hard Brexit are diminishing. Talk of a constitutional crisis seems exaggerated, but a solution does now seem to hinge on whether the referendum result is more or less democratic than the will of a majority of democratically elected MPs. Which takes precedence will determine what happens next. From an American who has lived in Rome for many years, the observation that chaos has different effects in different countries. Those used to a dysfunctional government, like Italians, take a little bit of uncertainty in their stride, whereas Brits and Americans are acclimatised to rational government and so are more likely to overreact to problems.

None of this makes investment easy, but whoever said it was supposed to be. I particularly liked a phrase embedded in a report from a hedge fund manager that sums up what those of us making investment decisions are trying to do. ‘‘Our strategy is to own the optionality of change without a significant negative bleed’’. American’s do have a way with words. Put another way, stay invested, but try not to lose too much on bad days.

My week included a trip to the Algarve to contribute to the annual conference of a multi-jurisdictional wealth management company. Comparing notes with advisers based in a dozen, predominantly European, countries was enlightening. A year ago, long term residents in EU countries with British passports were confused and angry. Now they seem more settled, having dealt with bureaucracy of the countries in which they live and work. Resilience is under-rated by politicians and headline writers. It was hard to gauge the mood of the local economy because out of season tourist towns are very quiet. Empty roads and shuttered shops have little to say. What I did learn is that residential construction is booming, funded by US private equity. Where the end demand will come from is another matter. However, clear blue skies and bright sunshine made a nice change from mid-winter London.

At the moment we seem to be beset by problems with no clear solution. Courtesy of an article written a few years ago by author and commentator Gerald Ashley which I have kept in a safe place until needed, some observations which I think have found their time:

  • Complex problems fall into three categories, messes, problems or puzzles. Each are different and need to be approached in different ways.
  • Messes are ill-defined in form and structure and so are most like real life.
  • Problems have a defined structure with potential solutions, but none are absolutely clear and right.
  • Puzzles are well defined and have specific solutions that can be worked out.

Most of us crave certainty and as much control as possible. Politicians and business leaders are just the same and perhaps even more so. ‘Bring me facts and experts. I want a solution now!’ By implication, those in positions of authority tend to treat most issues as puzzles, sometimes problems and never messes. As a result they tend to seek shortcuts to answers that are probably wrong. The biggest mistake is to carve out part of a mess, treat it as a problem and then solve it as a puzzle. This can lead to very bad decisions.

Apply this analysis at will to a complex problem near you.

Ask David a question
Investors should remember that the value of investments, and the income from them, can go down as well as up. You may not recover what you invest. This commentary has been produced for information purposes only and isn’t intended to constitute financial advice; investments referred to may not be suitable for all recipients. Any mention of a specific security should not be interpreted as a solicitation to buy or sell a specific security.

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