It's best to avoid diving into entire stock sectors, regions or styles this year, according to one international fund manager.
Investors have just endured a 2020 dominated by crazy unpredictable events, according to Fidelity International director Tom Stevenson.
"The year was dominated by the mother of all 'unknown unknowns'," he wrote on Livewire.
"The pandemic was a black swan, left field, out of the blue surprise to us all."
Fortunately, a sharp recovery since March provided some relief.
"A terrible year in so many ways turned out to be a lot kinder to investors than perhaps we deserved," said Stevenson.
"If someone had told us in March that many stock markets would end the year well ahead of where they had started, we would have taken it."
But despite the lucky escape, investors have again thrown money into the market like 2021 will be a predictable year only consisting of "known knowns".
Stevenson suspects this will burn many people.
"There remain more unknowns than knowns to my mind. And this will make it difficult to manage our investments this year," he said.
"Relying on the big market narratives that have driven returns in recent years looks risky. It feels like a year in which the micro will matter more than the macro. Stock-picking will determine success or failure more than making the big calls."
Now you actually have to be smart
Stevenson's advice to pick individual stocks in 2021 is a call for a more selective attitude than the past decade.
"For many years – and the pandemic did nothing to change this – investment success has reflected three binary decisions," he said.
"Being in the right sector: technology, not banks or energy. Picking the right style: growth not value. And being in the right place: if you had a big enough exposure to the US, the rest of your regional allocation didn't matter much."
The UK investment executive advised the rise of technology shares would continue and it's fair enough to pay a premium. But in 2021 you actually have to pick "tomorrow's winners", rather than gambling indiscriminately.
"As the digital revolution continues, governments look to build back better after the pandemic and the decarbonisation of the world gathers pace, there will be winners to spot and losers to avoid," he said.
"So, looking into 2021, I see less benefit to be gained from placing big bets and more from the harder graft of picking the best stocks across sectors, styles and regions."
Structural winners protect against unknown unknowns
Stevenson's stance matches Australian fund manager Jun Bei Liu's advice last week to seek out growth shares that will be "structural winners".
The portfolio manager at Tribeca Investment Partners told a GSFM briefing that company earnings had been on a downward spiral for 10 years before COVID-19.
"It's been declining for many, many decades. So the structural winners will always command a premium," she said.
"My view is that a portfolio will always have to have structural winners – because they will future-proof your portfolio."
She said a small increase in interest rates will not damage those companies that are benefitting from a fundamental shift in society or consumption.
"It is still at a 3-decade low… And we don't see that interest rate escalating to anything more meaningful in the next few years."
Stevenson warned investors to be ready for anything in 2021.
"We can only brace ourselves for the unknown unknowns that inevitably lie ahead."
