Global stock markets closed lower in May. Stocks lost 1,5% on average, Asian stock exchanges fell the most (-4,8%), European stocks were best performers (+0,8%).
High price increases can be again seen in the most overvalued parts of the stock market. Investors find them attractive not based on good operating business data, undervaluation or some other rational argument, but based on high expectations. Investors are expecting that these overvalued companies will revolutionise the world and in the mean time become almost pure monopolies. History has shown over and over again that these kind of stories end badly for investors. That is why we focus only on proven long term investment principles when managing FT Quant.
Even though that Fund’s investment strategy offers good long-term risk adjusted returns, there will be times when returns are low or negative. We have already seen this cycle from within since we went through one from 2014 to mid 2016 when all strategies that invest into undervalued stock underperformed the market and overvalued stocks. This negative part of the cycle can last from couple of months to couple of years but in the end it is always best to stick with proven investment principles. This is true for US market, developed markets, and emerging markets.
Since US economy is showing some signs of possible slowdown, we lowered the allocation to stocks to about 70%, 20% is in government bonds and 10% in cash which will be used for buying opportunities (if or when they arrise). If the US economy improves we will increase our exposure to stocks but if other economies around the world show some signs of weakness we will additionally lower our allocation to stocks. The Fund lost 1,95% in May.