Partner Insight: Bill McQuaker, portfolio manager of the Multi Asset Open range at Fidelity International, reveals how he continues to test market conditions every day to deliver the best possible returns for clients
In a career that spans more than three decades, several financial crises and a few booms as well, Bill McQuaker is the ideal fund manager to speak to when trying to decipher the current confusion surrounding global markets today.
McQuaker describes the current market environment as being "unambiguously late cycle." Recent figures from the OECD and the IMF show that output gaps in the US, UK and Europe have closed and that many economies are now operating above potential, while unemployment continues to fall by about 1% per annum. McQuaker admits that today's current bull market could go on for longer, though one of the most important lessons of his career is that nothing, not even a bull market, goes on forever. He adds "but the idea that there is ‘something' that always ‘tells' investors when markets reach the top is just not true."
"In each cycle, investors normally worry about what signalled the top of the market last time. But that worry can turn itself around and instead of worrying about it, you take reassurance from it. So [if] last time volatility was the key worry; well volatility today is at an all-time low so we don't need to worry about it. This is just not true." In recent weeks, of course, attitudes towards volatility have become a lot less complacent.
Referring to one of the first and biggest financial events he experienced as he was starting his career in October 1987, McQuaker explains how the narrative throughout the summer of 1987 portrayed the US and UK as ‘economic miracles'. Encouraged by the election of Ronald Reagan and Margaret Thatcher some years earlier, a laissez faire and free market attitude saw stockmarkets look beyond political turbulence or social pain and rise sharply.
By the summer of 1987, the FTSE 100 index was significantly above its long-term average, but the positive narrative changed in the space of just a single weekend in October. Fear quickly replaced greed on Black Monday.
"There was no bear market beforehand, and there was no recession after. It came out of nowhere. For me, the extent to which markets create their own circumstances was a key lesson from this crash," says McQuaker.
"This notion that stockmarkets look to the future and discount it, well, 2008 is a great example of markets that were incapable of discounting what had already happened. Even today, being late cycle, there is an air of ‘maybe this current notion can be sustained'."
McQuaker believes managers need to stay one step ahead by "nuancing" their portfolios to ensure they correctly react to the changing balance of risk. His strategy looks to constantly test the wind to see how market conditions have changed, or if something that seemed unlikely yesterday has become viable today.
This approach is particularly important now as economies find themselves in a "sweet spot" in terms of the rate of growth, the (low) volatility of that growth, the lack of significant inflation and consequently, any policy tightening. While all of this may seem like a positive for financial markets, allowing them to continue in their current state, McQuaker argues that the system is creating its own problems. None of it is necessarily sustainable in the medium to long term.
Click here to read the full interview with Bill McQuaker and learn more about Fidelity International's Multi Asset portfolios