Annual Letter

Dear Clients and Friends,

The course of investment markets over 2015 was volatile, and their path at the start of this year has been even more turbulent. In such an unsettled environment, it is easy to let emotions take over and fall into the trap of believing that the world is falling apart.

We liken it to a phenomenon called “spatial disorientation”, which occurs when a pilot incorrectly interprets position, altitude or airspeed. This can happen following a sudden change in acceleration or during times of low visibility. Making decisions based on emotion or “gut feeling” without considering what the instrument panel is displaying can be very dangerous – and for untrained pilots too often results in tragedy. For this reason, pilots are taught to trust their control panels over their instincts, as instruments tend to be more consistently reliable than human interpretation. In fact the term “flying by the seat of your pants” is meant to evoke images of unsafe pilots who make rash decisions rather than carefully considering what their readouts are telling them.

As we write our 11th annual letter and reflect on the current environment, we find this analogy to be very fitting. Investors have been whipsawed, and heightened volatility is causing people to feel disoriented. As emotion takes hold of the market, we find ourselves coming back to an old theme – one that we have reiterated time and time again – ignore the “noise” and stay on course.

It is easy to get caught up in the drama. The media is full of negative news about slowing Chinese economic growth, steep oil price declines and the possibility of domestic or global recession. Moreover, the massive central bank stimulus that developed out of the financial crisis is threatening to unwind, adding to uncertainty. In reaction to this negativity and ambiguity, investors are driving down markets almost uniformly. Out of 20 diverse market indices we regularly monitor across the globe (aside from sovereign bonds), the only one that has increased year-to-date is volatility.

In the face of turbulence, it is important to focus on the economic and financial “instrument panels” rather than how we are all feeling. For all the negative headlines, the reality is not so bad. The US economy seems to be on a solid footing with low unemployment, healthier consumer balance sheets, low inflation and greater business investment. Despite the threat of a breakup, the Eurozone has stayed intact, and the European economy is showing signs of life as unemployment decreases, manufacturing strengthens and consumer sentiment improves. Japan seems to be stuck in more neutral territory but does not appear to be deteriorating further. In China, the economy is still growing at over 6% per annum from an already large base (adding the equivalent of the entire Turkish economy each year) and there is a developing middle class that is inexorably driving consumer spending.

Even those areas that are receiving the most negative attention, such as the oil market, are not as bad as they are being made out. Based on a quick Google search of “oil prices”, the top five headlines included the words “slump”, “slide” and “loss”. No wonder investors are scared! However, as lower oil prices translate to lower petrol prices, they should act as a massively beneficial stimulus for the global economy. Deutsche Bank estimates that every $0.01 reduction in gas prices translates to roughly $1 billion in extra spending power annually. Certain companies, mainly those in the energy sector, will face difficult times, but the broader implication for the overall economy is very positive.

Through 2016 and beyond, we are focused on keeping a level head and using our instrument panel to stay oriented. We cannot predict how long the turbulence will last but we will continue to plot as smooth a course as we can through it. Emotions will run high and negative headlines will sell papers but the world is not going to end – fasten your seat belt and hold steady.

Update on Gatemore Capital Management

2015 continued to be a year of growth for Gatemore. In September we launched a Diversified Growth Fund, providing our pension clients with a turnkey investment option. The Gatemore DGF invests in a diversified basket of global growth strategies, and includes many of the niche funds that have delivered superior returns to our clients over time.

We added a new research analyst, Kevin Schoelzel, to our team. Based in New York, Kevin joined us from a Colorado-based multi-family investment office where he assisted with fund research. He graduated cum laude from Vanderbilt University with Bachelors of Arts degrees in Political Science and Economics & History with a minor in Engineering Management.

To accommodate our growing team in London, we moved into a new office last year just around the corner from our old space. It feels like home already and we are settled in nicely.

Thank you for all of your support and interest in Gatemore. We wish you and your families a happy, healthy 2016.