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Michael Clough | 22 September 2020

Staying out of the rough

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The past week was an exciting one for golf fans around the world. Normally, by this time of year, all four of golf’s major tournaments have been played and people like me must find alternative entertainment until the following April when the Masters tournament comes back around. This year has obviously been far from normal and the Covid pandemic meant the US Open, normally held in June, was pushed back to a late summer week in September. The US Open is regularly dubbed the ‘toughest test in golf’. One of the reasons is long, thick grass (known as rough) which sits unsettlingly closely to the finely manicured fairways, punishing any marginally errant shot. Within equities, growth exposure has been the equivalent of finding the fairway this year, whilst sole exposure to value has been akin to hacking through the deep rough.

Behavioural aspects and emotion are always present at any level in golf. A golfer who sees competitors pulling away might become far more risk seeking, leading them to attack flags they ordinarily might not, which can bring danger into play. Regardless of the emotion, it is important to never lose sight of the fundamentals. For the golfer, that’s their grip on the club, their posture or ball position in their stance. All three are often reasons for poor shots, admittedly along with a long list of technical reasons too. For us investors, we should never lose sight of the fundamentals either. It can be easy to blindly follow the crowd or chase fashionable momentum stocks that have led the market higher. Such behaviour is dangerous and can come back to bite. Instead, investors should rationally assess the prevailing economic environment and not be afraid to go against the grain.

In any sport at the highest level it is crucial not to compound mistakes. Doing so is a sure-fire way to end up with a sub optimal result. Top level golfers don’t just turn up to the first tee with a caddie by their side and take it from there. They will have played practice rounds in advance, taken notes on undulations, understood where the good misses are and where simply not to hit it. They have a process to fall back on if things don’t go their way. Unfortunately, we don’t have opportunities for ‘dry-runs’ when investing but we have our risk management processes to rely on. Scenario analysis,

or modelling expected returns over a horizon using current allocations and a set of market variables, is a practice we adopt and is a useful tool for understanding risk exposures. Similarly, regularly reviewing attribution provides a deeper understanding of where, and in what quantity, risks are in portfolios relative to strategic asset allocations.

The world’s best golfers are laser-focused on their objectives. Tiger Woods arguably did this better than any other sportsman in his prime. He wasn’t going to let crowd noise distract him from winning championships. As investors there is so much information available to us today from so many sources. Filtering the truly valuable information from the noise allows investors to focus on what really matters and that is certainly a prerequisite for making sensible decisions.

Winners in golf are determined over four rounds, not just after playing one great round. As investors, of course we deal with different horizons but the message is the same. At Momentum, we focus on the long term, remain committed to the fundamentals and stick to our processes. That’s how we seek to keep our client’s portfolios on course and out of the rough.

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