How to invest in 2023 – an HL fund manager’s view

Fund managers have to look to the future, to try and determine which companies will prosper and which might struggle.

Some fund managers operate by taking a view on the big picture and then try to put their pieces on the right places on the board, in order to benefit as events unfold. That’s not an easy game to play. You need to second-guess politicians, central bankers, economies, tycoons and natural events.

Few were calling for a pandemic to tear through the global economy when they wrote their predictions in December 2019. War in Ukraine wasn’t in many pundits’ projections for 2022. Even with hindsight, it seems most unlikely that the game of pass-the-chancellor that happened in the autumn of last year could’ve been possible.

The sheer unpredictability of the headlines makes investing based on what might be on tomorrow’s front pages rather unwise. Most of us understand that walking into a casino and sticking it all on black is not a long-term investment strategy. It’s much better to be positioned so you’re not exposed to such binary bets.

The case of energy, inflation and interest rates

Take energy prices for example. Much here depends on the outcome of the conflict in Ukraine. I think we can be very sure that Russia has been surprised by where it now finds itself, but not so sure about what happens next.

A compromise that ends the war and sends Russian gas flowing west once more might well see energy costs tumble. A terrible escalation could send prices even higher.

Inflation has in part been driven by rising energy prices, but lots of other factors have played a role too.

The New York Federal Reserve think the impacts of the pandemic on supply chains are fast-easing. But workers are agitating for wage rises to repair their real incomes. Central banks have been trying to restrain economies by raising interest rates, with increases in the US, Eurozone and the UK all announced in December, with hints of further rises to come.

Where will inflation and interest rates peak? Don’t ask an economist, and I say this as a once-upon-a-time economics graduate. Forecasters too often simply extrapolate, or their models place too much weight on the wrong indicators. In any case, it isn’t enough to know where interest rates will peak.

There’s the small matter of how long they stay there, how far they fall and where will inflation prove most (and least) persistent. Setting portfolio strategy to try and make these calls feels too much like black vs red.

At the heart of the issue is the simple fact that inflation can squeeze margins and higher interest rates can increase companies’ borrowing costs. The way to be relatively immune to either of these issues is to focus on businesses with pricing power.

How to find pricing power

A company that produces a great product, that’s not easy to find elsewhere, can set its own prices.

If costs rise, they can be passed onto the customer. If it’s borrowed sensibly, or not at all, then its margins are even more protected. This helps take all the noise around where inflation and interest rates will be out of the equation.

Rather than spend time fretting over what’s coming down the tracks, it’s better to think about strategies that could work independent of the daily noise.

That’s how we’ve operated the HL Select funds since we first set out our stall in 2016. We look for companies that can withstand the bumps in the road, rather than try to steer around every little obstacle.

That’s not the same as saying that it’s possible to never lose money on stocks and shares. Far from it. They’re intrinsically risky and given sentiment plays a big part in determining where prices move in the short term, losses are inevitable from time to time.

However, there’s a world of difference between a great business dipping, while it carries on serving its customers profitably, and the money lost forever when events force the closure of a weaker player.

Separating the weak from the strong

Focusing on how well-built a business is to withstand challenges and continue to deliver returns to investors is a much better way to achieve longer-term returns than by second guessing the news headlines.

Then by constructing portfolios to make sure the risks we can’t avoid are well spread, we hope to limit the impact of individual events.

Right now, it looks likely that there’ll be plenty of economic challenges ahead. Diversifying portfolios is crucial in tough times. Spreading your money across shares and bonds, and making sure you’re invested globally can help reduce your risk. Other types of investments, from property to commodities and precious metals can play a role too.

How to build a portfolio

This article isn’t personal advice. If you’re not sure what to do, ask for financial advice. All investments fall as well as rise in value, so you could get back less than you invest.

Steve Clayton is a Fund Manager of the HL Select range of funds.

The HL Select funds are run by our sister company Hargreaves Lansdown Fund Managers Ltd.

Find out more about HL Select

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