Didier Le Menestrel

Positive thinking

The winter storm Carmen inaugurated a series of anxiety-causing events that may be expected to set the prevailing tone throughout 2018. Already, by the end of the year, on top the geopolitical risks and the cataclysmic weather events, financial markets were dominated by uncertainty: 2017’s particularly market positive performances of (with most large European indexes up nearly 10%), were generally described as “crazy”. Other terms dominating news coverage of the markets, which has above all stood out by its strong momentum, have included “puzzling” “bubbles” and “inexplicable records”).

Too bad that still after following market developments over the last 26 years, we are still spending more time reassuring and deciphering anxieties of our compatriots instead of sharing our unwavering enthusiasm for investing in equities.

Nevertheless, year after year, the first lesson that we can offer from observing trends over a quarter of a century, and repeatedly corroborated by statistical studies1, is the following: over time investing in equities is the best way to fructify your savings.

You will no doubt say that “All this is a thing of the past and this time things will be different”! A refrain heard hundreds of times since the 1980s and always off the mark when compared with actual performances: over the last 26 years, despite two major financial crises plus a certain number of cyclical crises, the CAC 40 (this year celebrating its 30th anniversary) has delivered an average annual return2 (including dividends) of 7.3%. As for Echiquier Agressor, it has registered annual gains of 12.5% whereas Echiquier Patrimoine, your asset management fund (known as Echiquier 1 in 1991, has provided a very respectable performance of more than 4% per year.

Why then does this anxiety continue to dominate in the face of the facts among our communities when considering the question of savings?

The popular proverbs offer an explanation: “A bird in the hand is better than two in the bush” and “Nothing is lost if nothing is sold” largely explain this instinctive behaviour. These reflexes often rooted in popular common sense are difficult to challenge in a generation… above all when the savings of previous generations have regularly been lost as a result of disputes with neighbours. Today, European savers are still going through a learning curve in terms of gaining an understanding of financial markets compared with their Anglo-Saxon counterparts with a long-standing tradition of accumulating and managing their surplus financial wealth. And at a time when lifespans are lengthening and “risk free” compensation is continuing to contract, it is however vital that we learn how to dominate our instincts and move beyond our reflexes… The future of our retirement system is at stake.

Instead of worrying about an increasingly difficult future, we should therefore welcome the return in 2017 of the positive results achieved by active management that have outperformed their benchmarks3. Those who accept to take risks logically receive higher returns than those who simply react to market trends or intervene on the basis of very short-term approach… This trend should be confirmed in the years ahead! The interest rate environment and the price cap mechanisms for assets will inevitably increase the added value generated by active management and knowledge about companies.

For that reason, public, regulatory and tax policy must now encourage those who accept to devote the time required to develop a long-term approach. In 2018, this is possible !

Didier Le Menestrel

1 www.amf-france.org/Publications/Lettres-et-cahiers
2 Source Bloomberg
3 Source Morningstar