Decker’s parting advice: We’ve been here before
Bob Decker, like most money managers, vividly remembers the crash of 2008. It was painful for every investor, but perhaps due to blind faith or just his natural optimism, he never lost hope. Of course, he had been through something similar in 1987, which was as visceral an experience as he’s ever had during his more than three decades in the investment industry.
What these tumultuous times and similar but less dramatic recent market events taught him is something every investor should always remember: We’ve been here before and will be here again.
“You just have to divorce yourself from the financial media and the Street, because the world was never as bad as it was portrayed in 2009,” said the co-founder of Toronto-based Aurion Capital Management, who retired at the end of August.
It’s not entirely coincidental that significant points in the equity portfolio manager’s career happened around major inflection points in the market.
Decker started at Prudential Insurance in 1980, a time when many institutional investors felt behind the 8-ball given how badly high inflation was punishing fixed-income assets. Equity allocations, particularly for insurance companies, were typically below 25 per cent, so there was a rush to get equity returns to counterbalance some of those fixedincome losses.
“The next 25 years saw a cult of equities build up,” Decker said. “Now, institutions are back to their low-risk-tolerance stances, and overly committed to fixed income and low volatility strategies. There was a complete reversal during my career.”
After about seven years as an oil and gas portfolio manager, Decker made the move to Marquest Investment Counsel just before the market crash of 1987. That position helped form a relationship with the Shell Canada Pension Fund that still exists at Aurion today.
Decker eventually took an internal position managing Canadian equities at Shell, which evolved into a joint venture in 1996 that he led alongside Neil Jacoby and Paul Fahey.
It later became an independent firm, and DundeeWealth bought a 60 per cent stake in 2008. Today, Aurion is owned by Scotiabank, which bought DundeeWealth in 2011 and then purchased the remaining 40 per cent of Aurion in May 2014.
Regardless of the period, however, Decker has found that investors always chase the fad of the day, and the returns of the past three or four years.
“Each time, the bear market took those returns down significantly and investors realized they were dealing with a pretty volatile benchmark in the TSX composite,” he said. “In each subsequent market cycle, investors would reduce their allocations, but do so too late or mistime it.”
In other words, they gave money managers assets when times were good, and took it away when times were bad.
But it also appears that every cycle has created a little more hesitancy among investors to get overly bullish, something Decker thinks the current cycle is demonstrating once again.
“It seems like people were overly pessimistic up until the most recent couple of years, as each market event, such as macro drivers in Greece or China, appears to be exaggerated,” he said. “These overreactions are the worst they’ve ever been, so it’s hard to remember that there’s been times like this before.”
Pervasive low interest rates and a low-return environment in fixed income also serve to mute investors’ expectations, who remain more concerned about downside protection as a result of the 2008 market collapse.
“They’ve gone from volatility risk to valuation risk, as a lot of assets in low interest rate strategies have created a vulnerability — as we saw in the 1970s — to rising rates,” said Decker, who expects a rising rate and inflation environment over the next decade.
In other words, the cycle will begin again, but not until the appetite for risk returns, something Decker doesn’t expect until the millennials hit their peak earning period.
“That’s when I think there will be a bull market in risk-taking and the cycle will live again,” he said. “But it’s too soon and 2008 is just too fresh, certainly in the minds of baby boomers and also generation X, who are just in their wealth-building phase right now.”