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2017 General Election

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In the world of investments you are faced with the rather unnerving job of trying to predict the future, with the only guarantee being that at the end of any given period you can review your decisions and identify exactly which funds you should have bought and sold at exactly which point to maximise your returns.

The problem is of course, we do not operate in a world of hindsight and one of the key drivers of portfolio performance is the management of risk. Not eliminating risk, as this nullifies the potential for returns, but one of the many factors that is taken into account is the simple view of potential upside reward vs downside loss. It can be scientific and / or subjective, but if you believe the upside far outweighs the downside then it is an investment that qualifies for consideration.

Given this basic starting point, it is utterly baffling that anyone within the Conservative party put forward a case for calling a general election, the downside stakes were simply too high. A party that already had a working majority and a Prime Minister who had not been tested by the British voting public decided to risk, in one politician’s words, a “strong and stable” position with no real threat to its authority other than a few dissenting voices within its own ranks. Instead, it was another identifiable investment characteristic that took over – greed.

Fear and greed are the two extremes that cloud rational judgement – the Conservative think tank believed their stock was on the rise while Labour would sink to new lows. In hindsight both had reached their respective peak and trough prior to the election. It certainly did not require hindsight to decide on a risk / reward basis that an election was too heavily loaded on the downside for the incumbent ruling party, simply a basic understanding of risk management. We also have the surreal sideshow where the leader of the party that came second, both in terms of seats and overall votes, is claiming that they should be allowed to form a government based on the result of the voting – clearly misunderstanding how general elections in the UK work. Irrespective of political beliefs, this has been one of the more bizarre episodes in recent UK electoral history and for the voting public there is the real possibility that another trip to the village hall looms in the not too distant future – Brenda from Bristol will be apoplectic.

As for the (unpredictable) future, once again we are faced with uncertainty on the political front at a time when strong and stable leadership would have been particularly welcome in view of the upcoming Brexit negotiations. Sterling (predictably) weakened in the short term and the markets have held up relatively well in the few days since the result, and on the economic front the view is that a ”hard Brexit” is no longer likely, but trying to gauge how the negotiations between the current UK government and a group of 27 countries will develop is difficult.

Markets will remain fickle and it would not be a surprise if we had some long overdue volatility but the mantra does not change. We look for consistent fund managers who are aware of the risks and incorporate this as part of their overall investment process. We are well diversified across our portfolios and the fortunes (or otherwise) of the UK are not going to be the sole factor in determining returns, even for many of the UK based / listed companies which are effectively multi-national in terms of operations and revenues. Navigating short term issues is always part of long term investing, and we can be fairly confident, particularly with the benefit of hindsight, that short term noise will never go away.

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