Our Investment Committee continuously monitors markets, economic trends and the relative valuation of asset classes. We recognise that markets can occasionally become undervalued as well as overvalued. We employ an active approach to asset allocation, making tactical adjustments when necessary.
At Rivers Capital Management we believe that financial markets are efficient in the long run, but less so in the medium and short term. In the long run investment returns within different asset classes can be forecast and relied on with some accuracy. But as asset prices do not rise in a straight line, and are influenced by short term macroeconomic events, booms and recessions and human emotion or ‘animal spirits’, they frequently become over or undervalued relative to their long term averages. This gives added value to research on economies and systematic valuation analysis on asset classes, regional equity and bond markets, and individual securities, along with long term investment experience that has gone through similar phases in the past.
The cheaper you buy an asset relative to its long term average the more likely you will get a better long term return than the average historical return of that asset. For example, using a crude valuation method, if you bought the FTSE 100 Index at a 20 times multiple of price to earnings and you assume earnings growth over the next 10 years is 5% and its long term average multiple is 15 your expected return over those 10 years would be 22.17% excluding any dividends. If you bought the same Index at a 10 times multiple of earnings your expected return over 10 years would be 144.34% excluding dividends. Quite a big difference and a mistake people often make when convincing themselves to invest in an asset class that is trading well above its long term average valuation. Tactically, Rivers portfolios are overweight asset classes that we expect to perform better than their long term performance because they are undervalued relative to their long term average , and underweight those that we expect to perform worse because they are too expensive.
The Investment Committee meets to discuss asset valuations and market trends and whether these should lead to tactical asset allocation changes. These adjustments are made with the generic balanced model strategic asset allocation as a reference point. Our investment view is articulated with reference to 7 levels of tactical adjustment with 4 being the neutral position as shown below. The current allocation is articulated in published monthly factsheets and the Rivers Capital Management newsletter ‘Current Focus’.