While the equity investing landscape has admittedly turned more volatile in the past six months, we continue to believe most investors are so entrenched in “climbing a wall of worry” that they are missing a much more compelling story, as alluded to by Mr. Buckland. All this to say, for boutique equity investors like Laurus, we remain focussed on being invested in wealth‐creating businesses run by strong management teams. We believe – and statistics prove out – that these types of businesses will offer the greatest chance for our clients to achieve a positive outcome over time, despite any short‐term setbacks.

“There seems to be an unwritten rule on Wall Street: If you don’t understand it, then put your life savings into it.”

Peter Lynch

In a recent article written in the Financial Times, Robert Buckland (Chief Global Equity strategist at Citi) repeated the old market saw that “bull markets narrow”. For example, the SP500 return of 21% (in local dollars) in 2017 performed in line with other worldwide markets (MSCI Japan +24%, MSCI Europe +26%, MSCI EAFE +25%). However, in 2018 the SP500 has soldiered on to return +10% to August 31st (note: updated from the original July 31st noted in Mr. Buckland’s article) while other markets have waned (MSCI Japan ‐1.2%, Europe ‐2.2%, and EAFE ‐1.9%).

Certainly, much of this can be attributed to the benefits reaped by changes to US corporate tax as well as the strong corporate earnings growth.

But narrowing global stock leadership is part of every cycle. This time it’s the overall US market leading the way but the late 1980s bull market narrowed into Japanese equities, the late 90s narrowed into technology and telecom stocks, and the last cycle had EM‐related stocks ploughing ahead while other markets were starting to crack.

Of course, there are signs of narrowing market leadership within the US market itself. While the SP500 has posted an impressive gain of 10% year‐to‐date, the technology‐laden Nasdaq Composite has risen over 17%, equalled only by the SP600 small cap index. Buckland contends there is a good chance this market may narrow further, implying continued outperformance by US equities. Value investors will continue to be perplexed as the market continues to get dearer and refuses to fall back towards other global market valuations.

Our industry continues to consolidate and become even more competitive, resulting in shorter time frames and much lower patience levels. This is inversely proportionate to the real advantages of time – on average equity markets produce a terrific return compared to other investment alternatives over a long enough horizon.

We continue to see analyst comments that any dip in a stock’s earnings would be a buying opportunity. In other words, “we wouldn’t buy the stock here, but if it falls 3% or 4%, it’s a buy”. The fact that someone’s opinion of the attractiveness of a security can be so different between just a few percentage points is an illustration of how short‐sighted most market participants really are.

In their recent June 30th Market Trends report, global search consultant bfinance notes the three key equity themes of institutional investors evolving in 2018: continued interest in emerging markets, increasing interest in REITS and infrastructure‐themed equities, and greater interest in small cap equities. While multi‐asset managers continue to overweight growth assets, they also seek out a variety of alternative investments that will “hedge” any potential coming market correction.

Despite a very low probability of any bear market in the near future (liquidity tightening remains benign while fundamentals remain strong), it is typical that investor fears rise along with market prices. Downside protection continues to preoccupy investor allocations, leading to the ever‐increasing number of asset classes held in a portfolio. As we’ve written in the past, diversification is not about the number of asset classes held but, rather, the correlation of the returns among the asset classes.

While the equity investing landscape has admittedly turned more volatile in the past six months, we continue to believe most investors are so entrenched in “climbing a wall of worry” that they are missing a much more compelling story, as alluded to by Mr. Buckland.

All this to say, for boutique equity investors like Laurus, we remain focussed on being invested in wealth‐creating businesses run by strong management teams. We believe – and statistics prove out – that these types of businesses will offer the greatest chance for our clients to achieve a positive outcome over time, despite any short‐term setbacks.