ARTICLES

Our portfolios were mostly down over the month as bonds and equities markets sold-off.

Inflationary concerns have garnered the attention of the market with supply chain issues persisting and wages pressures growing. Central bank policy now poses the major risk to markets with the FED forced to react to inflationary risks as it appears to be “behind the curve”.

We remain concerned about the medium-term market and economic prospects, including the risk of stagflation, inflationary pressures persisting, recession and deflation, geopolitical risks, ongoing challenges to real growth and sustainable profitability, and highly elevated market valuations, and hence participating selectively in risk assets.

The greatest medium-term challenge for all portfolios is probably achieving returns without suffering unduly in future market crises as the reality of the fundamentals - challenged economic circumstances amidst high market valuations - becomes an issue again.

We are seeking to mitigate risks such as these and inflationary pressures in part by avoiding the worst of the market exuberance and with meaningful alternatives and selective commodities and resources allocations. We continue to see the need to have lower market risks, greater diversification and strong active management to produce acceptable risk/return trade-offs.

Our Cash Plus portfolio is very defensively positioned, while our Short-Term portfolio is relatively defensive, with both designed to be less volatile over shorter-term time periods than our longer duration portfolios.

Our more medium and longer-term orientated portfolios target returns and manage risk with longer-term time periods in mind. The Wealth Builders' larger risk tolerance gives us leeway to back higher risk assets based on our insights and research while still prudently managing risk over a longer-term time frame.

Dynamic Asset's portfolios are designed to be diversified but focus on investing where return prospects are assessed as capable of meeting the return objectives of the funds over their respective time horizons.

This diversification provides useful mitigation against risk over the appropriate time period consistent with each portfolio's objective, while our active assessment of risk and return can target capital to where it appears most prospectively and appropriately placed. In this way, we are much more forward-looking than a historical SAA approach which tends to be much more biased to what has happened (for example, by relying more upon past correlations and volatility - which may be markedly different from the future). 

We are better positioned for inflation than most as we hold meaningful weightings to 'hard assets' in different guises, and continue to expect these to provide valuable return and risk contributions over time, even if they are occasionally volatile. We believe large and unsustainable debt burdens, poor government policies and market interference continue to strangle real productivity growth for much of the economy, albeit nominal growth has markedly improved for now.

This potentially bodes relatively poorly for traditional risk assets and index investing, upon which most traditional investment strategies and super funds are heavily dependent. Furthermore, we think good active managers will better be able to differentiate themselves and add value over the next few years, in part by being more nimble and able to differentiate between assets based upon their prospects in different economic circumstances and very disparate valuations.

We continue to be very concerned about high asset prices. We think investors are best served by thinking outside the box in order to better protect and grow their capital, including potentially greater use of liquid value-adding alternatives (selectively chosen), along with precious metals exposures and greater weightings to real assets. We aim to remain astute and flexible, and highly risk-aware in an ever-changing and potentially highly challenging investment climate.

Global equity markets surged in 2021 on the back of unprecedented monetary and fiscal stimulus, strong economic activity and burgeoning corporate earnings. Not even the headwinds of soaring inflation, new COVID variants and a recent hawkish tilt by the US Federal Reserve and other central banks around the globe could dampen the exuberance in the final days of December 2021.

Australian employment data provided continued to improve throughout 2021. The unemployment rate came in at 4.6% in November, with 366,100 new jobs added, well above market expectations. The employment report was a real bright spot, with 128,300 full-time jobs and the participation rate lifted back toward pre-COVID levels at 66.1%. Australia has been one of the best-performing nations regarding economic recovery but hit a speed bump in the third quarter of 2021 with renewed lockdowns caused by the Delta variant.

In 2021 on a total-return basis, the S&P 500 was the standout gaining +28.8%, the tech-heavy Nasdaq 100 +27.6%, Nasdaq Comp +22.3%, the Dow Jones Industrial +21.0%, and the small-cap Russell 2000 index lifted +15.2%. The ASX 200 posted a +15.92% gain (all quoted in local currency terms). Since the global financial crisis lows in 2009, 2021 was the second time in the last 13 years where the S&P 500 has outperformed the Nasdaq 100. Given the Nasdaq 100 outperformed the S&P 500 in 2020 by +31%, it held up relatively well. 

The Russell 2000 only gained modestly in 2021, but the small-cap index owns the best returns since the COVID pandemic lows. From the low point in equity markets in March 2020, the Russell 2000 Index has gained over +156%. For comparison, the Nasdaq 100 gained +149%, S&P 500 +120%, Dow Jones Industrial Average +104% in the same timeframe. 

December 2021 Summary

• Global equity markets gained in 2021 on the back of unprecedented monetary and fiscal stimulus
• US equity indices enjoyed solid gains for the third straight year 
• All of the 11 sectors in US equity markets posted double-digit returns for the first since records began in 2001
• Growth outperformed Value for the fifth consecutive year
• Inflation is rising at the fastest pace in 40 years
• The Bloomberg Commodity Index gained over +27% for the year
• The US Fed commenced tapering of their QE program, and three interest rate hikes are expected in 2022

Equity Market Sectors

According to Bloomberg data dating back to 2001, it's the first time all eleven of the equity market sectors have achieved double-digit annual returns. The top-performing sectors being Energy +54.5%, REITs +45.9%, Financials +35.0%, and Technology +34.4%. Surging oil prices benefited the energy sector with strong demand for petroleum around the globe. High yielding real estate investment trusts (REITs) reaped the rewards of ultra-low interest rates and strong demand for rental properties and warehouse space. 

M&A Activity

Large-cap financial institutions with exposure to capital markets gained in 2021 from the record merger and acquisition (M&A) and initial public offering (IPO) activity. Global M&A deals surpassed $5 trillion for the first time ever, beating the previous high of $4.4 trillion in 2007. Deal volumes in the US almost doubled on the previous year to $2.6 trillion, and private equity deals set a record at nearly $1 trillion. We saw a record 1032 IPOs in the US, a 5x increase on the yearly average of the previous decade. 

Inflationary Pressures

Inflation came back with a vengeance last year, with the COVID pandemic and preceding policy responses having a profound impact on demand, supply and labour around the globe. The manufacturing shutdowns seen in 2020 damaged the global supply chains across multiple sectors whilst also shifting demand away from services and towards goods. We saw $6.6 trillion in fiscal spending in the US, as the Federal Reserve provided wide-ranging support to financial markets, including the zero interest rate policy (ZIRP) and quantitative easing (QE). The November reading of the consumer price index (CPI) showed a +6.8% gain in the previous 12 months, the fastest increase in 40 years. 

Commodities

WTI Crude Oil gained +55.3% in 2021, while gasoline prices lifted +58.1%. Coffee added +76.2%, Lumber +58.1%, Natural Gas +46.0%, Cotton +43%, Aluminium +41.1%, Copper 28.6% and Wheat +21.2%. Precious metals including Gold and Silver were the laggards in the sector, declining -4.3% and -11.9%, respectively. The Bloomberg Commodity Index (BCOM) gained over +27% for the year, which is the largest annual gain since 1979, adding to the global inflationary pressures. 

US Federal Reserve

At the November 3rd meeting, the US Federal Reserve shifted its stance towards more hawkish policy settings by announcing it will begin tapering the asset purchase program by $15 billion per month. By the December meeting, they reduced purchases further by $30 billion per month, which means the program will finish by March at the current rate of reduction. The term 'transitory inflation' was retired from the Fed's monthly statement, and interest rate futures began pricing up to three rate increases this year. 

Looking Ahead

Equity markets pushed to new highs in the final days of the year, which might suggest investors are not expecting ongoing shutdowns related to the Omicron COVID variant and lockdowns to begin easing soon. Corporate earnings have remained strong, showing it is possible to navigate the supply chain issues and inflationary pressures seen in recent months. Historically for equity markets, weak performance tends to self-perpetuate, and the same is true for strong performance. Just because we have seen three consecutive positive years does not imply we will soon see a trend reversal. The path of least resistance remains higher for equity markets at this point in time. 

Our portfolios all provided positive returns over the month. Inflationary concerns have risen in recent months with supply chain issues persisting and wages pressures growing. Central bank policy now poses the major risk to markets with the FED forced to react to inflationary risks as it appears to be “behind the curve”.

We remain concerned about medium-term market and economic prospects, including the risk of stagflation, inflationary pressures persisting, recession and deflation, geopolitical risks, ongoing challenges to real growth and sustainable profitability, and highly elevated market valuations, and are hence participating selectively in risk assets. We are seeking to mitigate risks such as these and inflationary pressures in part by avoiding the worst of the market exuberance and with meaningful alternatives, selective commodities and resources allocations.  We continue to see the need to have lower market risks, greater diversification and strong active management to produce acceptable risk/return trade-offs. 

We continue to look to diversify the portfolios where appropriate and sensible. 

Our Cash-Plus portfolio is very defensively positioned, while our Short-Term portfolio is relatively defensive, with both designed to be less volatile over shorter-term time periods than our longer duration portfolios.    

Our more medium and longer-term orientated portfolios target returns and manage risk with longer-term time periods in mind. The Wealth Builder’s larger risk tolerance gives us most leeway to back higher risk assets based on our insights and research while still managing risk prudently over a longer-term time frame. 

Dynamic Asset’s portfolios are designed to be diversified but focus on investing where return prospects are assessed as capable of meeting the return objectives of the funds over their respective time horizons. This diversification provides useful mitigation against risk over the appropriate time period consistent with each portfolio’s objective, while our active assessment of risk and return can target capital to where it appears most prospectively and appropriately placed. In this way, we are much more forward-looking than a historical SAA approach which tends to be much more biased to what has happened (for example, by relying more upon past correlations and volatility - which may be markedly different from the future). 

We consider future scenarios actively and if there is a major regime shift - such as towards inflationary positioning rather than disinflation - our approach and portfolio is able to respond to this. (That said, the market outlook remains challenging for everyone currently, no matter what the approach). For example, and in particular, we hold meaningful weightings to ‘hard assets’ in different guises and continue to expect these to provide valuable return and risk contributions over time, even if they are occasionally volatile. We believe large and unsustainable debt burdens, poor government policies, and market interference continue to strangle real productivity growth for much of the economy, albeit nominal growth has markedly improved. This potentially bodes relatively poorly for traditional risk assets and index investing, upon which most traditional investment strategies and super funds are heavily dependent. Furthermore, we think good active managers will better be able to differentiate themselves and add value over the next few years, in part by being more nimble and able to differentiate between assets based upon their prospects in different economic circumstances and very disparate valuations.

We continue to be very concerned about high asset prices. We think investors are best served by thinking outside the box in order to better protect and grow their capital, including potentially greater use of liquid value-adding alternatives (selectively chosen), discounted listed investment companies (selectively chosen and now more difficult to identify), along with precious metals exposures and greater weightings to real assets. We aim to remain astute, flexible, and highly risk-aware and are invested in liquid assets whose weightings we can adjust over time to respond to an ever-changing and potentially highly challenging investment climate.

Our portfolios provided reasonably good returns over the month in what was generally a weak month for markets, with the shorter duration portfolios being the exception with modest negative returns. All our longer duration and more diversified portfolios provided positive returns as we benefited from our diversification.

In recent months, inflationary concerns have risen, with supply chain issues persisting and wages pressures growing. Central bank policy now poses the major risk to markets should the FED be forced to react to inflationary risks as it appears to be “behind the curve”.

We remain concerned about the medium-term market and economic prospects, including the risk of stagflation, inflationary pressures persistently, deflation without further stimulus, geopolitical risks, ongoing challenges to real growth and sustainable profitability, and highly elevated market valuations, and are hence participating selectively in risk assets. The greatest medium-term challenge for all portfolios is achieving returns without suffering unduly in future market crises as the reality of our challenging economic circumstances becomes an issue again.

We are seeking to mitigate risks such as these and inflationary pressures in part by avoiding the worst of the market exuberance and with meaningful alternatives and selective commodities and resources allocations. We continue to see the need to have lower market risk, greater diversification and strong active management to produce acceptable risk/return trade-offs.  

Our portfolios are designed to be diversified, but focus on investing where return prospects are assessed as capable of meeting the return objectives of the funds over their respective time horizons. This diversification provides useful mitigation against risk over the appropriate time period consistent with each portfolio’s objective, while our active assessment of risk and return can target capital to where it appears most prospectively and appropriately placed. In this way, we are much more forward-looking than a historical SAA approach which tends to be much more biased to what has happened (for example, by relying more upon past correlations and volatility - which may be markedly different from the future). We consider future scenarios actively, and if there is a major regime shift - such as towards inflationary positioning rather than disinflation - our approach and portfolio should be much more effective than the average. That said, the market outlook remains challenging for everyone currently, no matter what the approach.

Our Cash Plus portfolio is very defensively positioned, while our Short Term portfolio is relatively defensive, with both designed to be less volatile over shorter-term time periods than our longer duration portfolios.

Our more medium and longer-term orientated portfolios target returns and manage risk with longer-term time periods in mind.

Overall, we consider that extraordinary monetary and fiscal stimuli have been implemented by central banks and governments, creating distortions through market interference. The sheer size and extent of their actions are providing meaningful impacts on market returns and, in many cases, causing substantive dislocations from underlying company and economic fundamentals.

Over time, we expect these policies to be very supportive for certain portfolio positions and require dynamic management of others. For example, and in particular, we hold meaningful weightings to ‘hard assets’ in different guises, and continue to expect these to provide valuable return and risk contributions over time, even if they are occasionally volatile. We believe large and unsustainable debt burdens, poor government policies, and market interference continue to strangle real productivity growth for much of the economy, albeit nominal growth has markedly improved.

This potentially bodes relatively poorly for traditional risk assets and index investing, upon which most traditional investment strategies and super funds are heavily dependent. We think good active managers will better be able to differentiate themselves and add value over the next few years, in part by being more nimble and able to differentiate between assets based upon their prospects in different economic circumstances and very disparate valuations.

We continue to be concerned about asset prices. We believe growth outcomes, geopolitical tensions and other risks and shocks pose further (unanticipated) risk to markets, potentially just as coronavirus has continued to surprise. We hence think investors are best served by thinking outside the box in order to better protect and grow their capital, including potentially greater use of liquid value-adding alternatives (selectively chosen), discounted listed investment companies (selectively chosen and now more difficult to identify), along with precious metals exposures and greater weightings to real assets.

We aim to remain astute and flexible, and highly risk-aware, and are invested in liquid assets whose weightings we can adjust over time to respond to an ever-changing and potentially highly challenging investment climate.

The ASX200 posted its third consecutive monthly decline in November after a late sell-off led to a -0.5% decline on the month. Still, the ASX200 was a relative outperformer when compared to the -0.7% drop in the S&P500 and the larger losses seen in Europe (-2.3%) and emerging markets (-3.2%). In November, Australian Government bonds found a bid, with the yield falling by 38bps after rising by 59bps in October. The AU 10Y bond yield closed at 1.70% in November, off the highs seen in October of 2.07%. 

US Federal Reserve Chairman Powell's comments during the month caught the market by surprise, suggesting it was time to retire the word 'transitory' regarding the inflation outlook. Seeming more concerned about having to adjust monetary policy to keep the inflationary pressures in check and that he thought it was important to complete the tapering process faster than previously expected. 

Market participants had speculated that the rising Omicron COVID cases might encourage the Fed to slow down on their tapering plans, especially after highlighting this concern specifically during the month by saying that Omicron could pose downside risks to economic activity, employment and inflation. A hasty taper plan could mean that we see rate hikes sooner than previously forecast, which could be highly impactful to markets. Fed fund interest rate futures are pricing in a 28% chance of a rate hike by March 2022 and a 58% chance for May 2022.  

November 2021 Summary

• The local economy posted a -1.9% contraction in Q3 but was +3.9% higher than the same period one year prior
• Home prices in Australia are still rallying, up +1.1 % M/M across eight capital cities
• The US Fed's Powell stated, "it is probably a good time to retire the word transitory with regards to inflation." 
• The COVID Omicron variant has startled markets in recent weeks
• Crude oil lost over -20% in November due to Omicron fears
• The VIX Index surged the most since February 2020
• Holiday sales have so far been robust but slightly below market expectations

Equity Markets

The major equity markets indexes all made new highs early in the month of November but failed to hold onto the gains, with only the Nasdaq 100 / Composite ending the month in the green. For the first time in over ten years, the S&P500 closed the month in the red, breaking a typically strong month for equities. The Russell 2000 small-cap index saw some notable volatility, falling over -4.2% from the highs set in the first week in November. The sell-off in small-caps was so dramatic that some key support levels were breached, including the 50-day and 200-day moving averages.  

Earnings Season

US corporate earnings beat expectations handily in Q3 2021, coinciding with equity markets rallying to new highs in the first week of November. FactSet data shows that 83% beat market consensus EPS expectations. Companies are essentially reporting earnings that are 10% above the market expectations. FactSet highlighted that close to 350 of the 500 companies in the S&P500 noted the term "supply chain" on their conference calls, the highest in over ten years. 

Volatility Index

Volatility measured by the VIX Index saw its most significant monthly gain since February 2020 in November, with the index jumping +68% in the month, trading at a low of 14.72 on November 4th to a high point of 28.98 on the 26th, which was the day after the Thanksgiving holiday—primarily attributed to the Omicron COVID variant spooking market participants.

US Economic Data

The Department of Labor in the US released the Employment Situation Report on November 5th, showing +531,000 new jobs were created vs market expectations of 450,000, and the unemployment rate fell to +4.6%. Hourly wages grew modestly at +4.4%, while the labour force participation rate stayed the same at 61.6%. CPI in October came in red hot, up +0.9% M/M compared to a +0.6% expectation and showing a +6.2% Y/Y, which is the fastest increase in prices since 1990. 

Oil Markets

Crude oil prices lost ground to the tune of -20% in November after topping out at multi-year highs around $85/bbl but is still up +38% YTD. President Joe Biden, along with other OPEC member countries, announced the release of strategic reserves in an attempt to lower prices at the gas pump. The average price of a gallon of fuel in the US is $3.40 when 12 months ago, a gallon cost $2.13 (+60% Y/Y), according to AAA data. 

US Dollar

The US Fed seems more hawkish by the day, and rising inflation levels have given the US dollar a tailwind of late, accelerating the recent rally in the currency. The Greenback posted a 16-month high at $96.940 on November 24th before consolidating into month-end. The US Dollar Index (DXY) gained +1.86% for the month of November.

Bitcoin Volatility

Bitcoin lifted above $68,000 at the start of November, which is a new all-time high in the digital currency, before coming under the same selling pressures seen in other risk assets, seemingly on the back of the inflationary fears and Omicron COVID variant at the end of the month. Bitcoin closed the month down -6.9%.  

Looking Ahead

Hotter than expected inflation numbers, a more hawkish Fed and the new Omicron COVID variant were enough to drive markets lower in November. The market will now look to the following US Fed policy meeting on December 15th for clarification on the speed of tapering and what the interest rate expectations look like into 2022. Equity markets tend to wind down in the latter stages of December with a bias to the topside.

After a brief pause in September, equity markets surged to fresh highs in October as the S&P500 posted its best performance of the year so far. Equities caught a bid on the back of solid earnings and rising risk appetite as Congress drew closer to a solid spending package. Stocks rose in unison with oil prices, with WTI crude lifting over +10% in the month, fetching near a seven-year high around $86/bbl as consumption dwarfed supply draining oil reserves. The ASX 200 slightly declined for the second month running, dipping by 0.1% in October. The ASX200 lagged last month due to an uptick in inflation and tighter monetary policy in Australia compared to other developed economies.

Earnings season started positively, but economic data began to muddy the waters as consumer prices continued higher. If prices continue to rise further, the Federal Reserve may have to cut back on its support for the economy and start to raise interest rates, even though the US economy grew only 0.5% in Q3, which is the weakest growth figure since the pandemic began. The Federal Reserve has signalled that it does not plan on raising interest rates soon, but the market now expects to taper their bond-buying program in the months ahead. 

Bottlenecks in the global supply chain and the combination of rising energy prices have investors on their toes regarding the inflation outlook. The short end of the curve has begun to rise as expectations for interest rate hikes around the globe have been brought forward. Many Central Banks worldwide have become more hawkish in their views which have put upward pressure on yields. The Bank of Canada surprised the market by ending its bond-buying program abruptly and signalled rate hikes in the near future. The Bank of England is preparing to raise rates in November, and the Reserve Bank of Australia abandoned the 'yield curve control policy'. 

October 2021 Summary:

• The short end of the curve climbed as markets priced in rate hikes in 2022.
• Iron ore dipped to $108/Mt as fallout from the property sector weighed on the steel output, and production was cut back due to power outage.
• Stocks posted new all-time highs as Congress came closer to a spending deal and earnings season kicked off.
• The yield curve flattened in the US, leaving many asking if the economy could handle sustained higher rates.
• CPI figures continued higher while PPI data came in a touch softer, which means price pressures may ease in the months ahead.

All of the eleven equity market sectors finished higher, led by Energy and Consumer Discretionary stocks, both up over +10% for October. The Russell 1000 Growth index was the standout performer gaining +8.5%, and the Value sector gained +5.2%. Small and micro caps enjoyed gains of +4.3% and +2.3%, all quoted on a total return basis.  

Commodity Markets:

The largest gains in the commodity markets in October were seen in the oil markets, with WTI futures closing the month higher by +10.3% and Brent crude close behind with +8.1%. Agriculture markets have seen a modest bid recently, and Corn was the standout this month, gaining close to +6.0%. Natural Gas futures experienced some volatility after spiking higher to start the month, ending down -9.1%, and Gold ticked up slightly, gaining +1.5%. The Bloomberg Commodity Index (BCOM) also printed new highs to start Q4, finishing up +2.7% in October. 

Earnings Season: 

We've now passed the mid-point of the Q2 earnings season with over 50% of S&P500 companies have reported, and we have seen positive earnings surprise in over 80% of those companies, with an average beat of almost 10% vs market expectations. These numbers are above the five year average of 75% and 8.2%. Equally impressive are the earnings growth numbers, with just under 81% reporting positive growth with an average growth rate of 39%. 

Interest Rates:

US2Y Treasury yields spiked higher in October to close 0.56%, which is up significantly from the 0.27% close in September, causing the yield curve to flatten. The US10Y yields climbed but at a slower rate, closing the month at 1.56%, up from 1.48% the month prior. US30Y yields fell at the beginning of Q4, finishing the month at 1.93%, from 2.03% in September. There is currently 1% between the US2Y and US10Y yields, but an inversion of that spread is typically followed by a recession which is one metric to watch. 

Cryptocurrencies: 

Bitcoin rallied to new highs in October after trending mostly down in September, hitting a high point of around $66,000/coin, as the first Bitcoin ETF was launched. Ethereum also pushed to new highs in October, trading above $4,400 after an upgrade to its network was well-received. Interestingly, the price action in Ethereum since the start of winter shows similarities to Bitcoin's 2017 run higher during the same time period. 

The Months Ahead:

Equity markets are at record highs at the time of writing, and with November being a seasonally strong month, we may continue to see markets push higher. November is the best month for equity market returns on a 10Y timeframe. The upcoming holiday shopping season and corporate earnings should give markets a tailwind into the year's end. Still, it is worth watching the impact of the Fed tapering their bond-buying program, supply chain bottlenecks around the world and the rising consumer prices, which could cause markets to temper their risk appetite.

Our portfolios provided disparate returns over the month, with the shorter duration portfolios affected by poor market conditions for bonds and cash – which were challenged by inflationary surprises.  Our longer duration and more diversified portfolios provided positive returns as our inflationary positioning benefitted the portfolios.

Inflationary concerns have risen in recent months with supply chain issues persisting and other inflationary issues growing.  The bond market has become concerned about inflationary pressures challenging unsustainable central bank policy, along with the risk of another economic slowdown.

We remain concerned about medium-term market and economic prospects including the risk of stagflation, inflationary pressures persistently, deflation without further stimulus, geopolitical risks, ongoing challenges to real growth and sustainable profitability, and highly elevated market valuations, and are hence participating selectively in risk assets.  The greatest medium-term challenge for all portfolios is probably achieving returns without suffering unduly in future market crises as the reality of our challenged economic circumstances becomes an issue again.   We are seeking to mitigate risks such as these and inflationary pressures in part by avoiding the worst of the market exuberance and with meaningful alternatives and selective commodities and resources allocations. 

We continue to see the need for strong active management to produce acceptable risk/return trade-offs. 

We continue to look to diversify the portfolios where appropriate and sensible.  We continue to believe some meaningful exposure to assets such as precious metals are essential as a hedge to navigate the coming months if governments continue to provide massive stimulus and inflationary pressures continue.  Our non-consensus position here has begun to be rewarded again in recent times.  We note that economic and political risks remain very elevated globally with a real risk of future conflicts.

Our Cash Plus portfolio is very defensively positioned, while our Short Term portfolio is relatively defensive, with both designed to be less volatile over shorter-term time periods than our longer duration portfolios.   

Our more medium and longer-term orientated portfolios target returns and manage risk with longer-term time periods in mind.  The Wealth Builder’s larger risk tolerance gives us the most leeway to back higher risk assets on the basis of our insights and research, while still managing risk prudently over a longer-term time frame; it is in many ways a flagship portfolio for DAC and has – along with our other portfolios - proven highly competitive with both liquid retail and institutional portfolios of a similar nature.  Active management in general has become more productive since COVID, despite large flows to more passive instruments.

DAC’s portfolios are designed to be diversified, but focus on investing where return prospects are assessed as capable of meeting the return objectives of the funds over their respective time horizons.  This diversification provides useful mitigation against risk over the appropriate time period consistent with each portfolio’s objective, while our active assessment of risk and return can target capital to where it appears most prospectively and appropriately placed.  In this way, we are much more forward-looking than a historical SAA approach which tends to be much more biased to what has happened (for example, by relying more upon past correlations and volatility - which may be markedly different from the future).  We consider future scenarios actively and if there is a major regime shift - such as towards inflation rather than disinflation - our approach and portfolio should be much more effective.  That said, the market outlook remains challenging for everyone currently, no matter what the approach.

Extraordinary monetary and fiscal stimuli have been implemented by central banks and governments, creating distortions and market interference.  The sheer size and extent of their actions is providing meaningful impacts on market returns and, in many cases, causing substantive dislocations from underlying company and economic fundamentals.  Over time, we expect these policies to be very supportive for certain portfolio positions and require dynamic management of others.  For example, and in particular, we hold meaningful weightings to ‘hard assets’ in different guises, and continue to expect these to provide valuable return and risk contributions over time, even if they are occasionally volatile.  We believe large and unsustainable debt burdens, poor government policies and market interference continue to strangle real productivity growth for much of the economy, albeit nominal growth has markedly improved.  This potentially bodes relatively poorly for traditional risk assets and index investing, upon which most traditional investment strategies and super funds are heavily dependent.  Furthermore, we think good active managers will better be able to differentiate themselves and add value over the next few years, in part by being more nimble and able to differentiate between assets based upon their prospects in different economic circumstances and very disparate valuations.

We continue to be concerned about asset prices.  We believe growth outcomes, geopolitical tensions and other risks and shocks pose further (unanticipated) risk to markets, potentially just as coronavirus has.  Indeed, it may take a market shock to end the current market rally given many investors appear to have become entirely valuation insensitive in the face of massive stimulus.  We hence think investors are best served by thinking outside the box in order to better protect and grow their capital, including potentially greater use of liquid value-adding alternatives (selectively chosen), discounted listed investment companies (selectively chosen and now more difficult to identify), along with precious metals exposures and greater weightings to real assets. 

We aim to remain astute and flexible and highly risk-aware and are invested in liquid assets whose weightings we can adjust over time to respond to an ever changing and potentially highly challenging investment climate.

Our portfolios provided relative defensive outcomes for the month as most markets suffered relatively meaningful losses.

With reopening now imminent, inflationary concerns have risen in response to past excessive degrees of stimulus. The bond market is becoming a little more concerned about inflationary pressures, and the risk of another economic slowdown as the prospects of central bank tapering looms.

We remain concerned about medium-term market and economic prospects including the risk of stagflation, deflation without further stimulus, geopolitical risks, ongoing challenges to true corporate profitability, and highly elevated market valuations. We are hence participating very selectively in risk assets. The greatest medium-term challenge for all portfolios is probably achieving returns without suffering unduly in continuing market crises. We are seeking to mitigate risks such as these and inflationary pressures in part by avoiding the worst of the market exuberance and with meaningful alternatives and selective commodities and resources allocations. We continue to see the need for strong active management to produce acceptable risk/return trade-offs. 

We continue to look to diversify the portfolios where appropriate and sensible. We continue to believe some meaningful exposure to assets such as precious metals are essential as a hedge to navigate the coming months if governments continue to provide massive stimulus and inflationary pressures continue. We note that economic and political risks remain very elevated globally with a real risk of future conflicts.

Our Cash Plus portfolio is very defensively positioned, while our Short Term portfolio is relatively defensive, with both designed to be less volatile over shorter-term time periods than our longer duration portfolios.   

Our more medium and longer-term orientated portfolios target returns and manage risk with longer-term time periods in mind. The Wealth Builder’s larger risk tolerance gives us most leeway to back higher risk assets on the basis of our insights and research, while still managing risk prudently over a longer-term time frame. Active management in general has become more productive since COVID, despite large flows to more passive instruments.

Dynamic Asset’s portfolios are designed to be diversified but focus on investing where return prospects are assessed as capable of meeting the return objectives of the funds over their respective time horizons. This diversification provides useful mitigation against risk over the appropriate time period consistent with each portfolio’s objective, while our active assessment of risk and return can target capital to where it appears most prospectively and appropriately placed. 

Extraordinary monetary and fiscal stimuli have been implemented by central banks and governments, creating distortions and market interference. The sheer size and extent of their actions are providing meaningful impacts on market returns and, in many cases, causing substantive dislocations from underlying company and economic fundamentals. Over time, we expect these policies to be very supportive for certain portfolio positions and require dynamic management of others. For example, and in particular, we hold meaningful weightings to ‘hard assets’ in different guises, and continue to expect these to provide valuable return and risk contributions over time, even if they are occasionally volatile. We believe large and unsustainable debt burdens, poor government policies and market interference continue to strangle real productivity growth for much of the economy, albeit nominal growth has markedly improved. This potentially bodes relatively poorly for traditional risk assets and index investing, upon which most traditional investment strategies and super funds are heavily dependent. 

We also continue to be concerned about asset prices. We believe growth outcomes, geopolitical tensions and other risks and shocks pose further (unanticipated) risk to markets, potentially just as coronavirus has. Indeed, it may take a market shock to end the current market rally given many investors appear to have become entirely valuation insensitive in the face of massive stimulus. 

We believe good active managers will better be able to differentiate themselves and add value over the next few years, in part by being more nimble and able to differentiate between assets based upon their prospects in different economic circumstances and very disparate valuations. We think investors are best served by thinking outside the box in order to better protect and grow their capital, including potentially greater use of liquid value-adding alternatives (selectively chosen), discounted listed investment companies (selectively chosen and now more difficult to identify), along with precious metals exposures and greater weightings to real assets. 

We aim to remain astute, flexible and highly risk-aware and are invested in liquid assets whose weightings we can adjust over time to respond to an ever-changing and potentially highly challenging investment climate.

The 3rd quarter has now drawn to a close, and investors are sighting a number of cautionary factors to consider for the remainder of the year. After a strong performance in equity markets since the beginning of 2021, investor risk appetite is beginning to show signs of slowing, with the US Fed and many other Central Banks around the world tilting towards tapering their stimulus programs and bond yields around the globe beginning to rise.

In Australia, we saw the extension of lockdown measures in both NSW and Victoria, but that had little negative effect on equity markets, as the market began to price in a delay on the RBA's tapering plans, contrary to many other Central Banks. Improved vaccination rates and a clearer picture of the reopening plans has allowed investors to look through the lockdown related contraction to a solid outlook for the economy in 2022. For the third quarter, the ASX200 posted a +1.7% gain which beat both the US and European indices, which returned +0.6% but lagged Japan which gained a standout +5.3% (all in AUD terms). 

In recent weeks, natural gas prices in Asia and Europe have surged, prompting further concerns that inflationary pressures might last longer than Central Banks and market participants currently expect. As the Northern hemisphere heads towards winter, increasing energy costs are expected to impact global growth if the trend continues. The Bloomberg Commodity Index jumped +5% in September and is now up +29.2% year to date. Natural Gas surged +34% in September and +135% for the year. WTI lifted +14.2%. +56% for the year, for the highest monthly close since 2014. 

In US corporate news, constant chatter about supply chain constraints dominated the airwaves in September and seemed to be deteriorating rather than showing signs of improving. This news, alongside potential technical factors relating to month-end and quarter-end, triggered a three-day sell-off in US equity markets in the final days of September. The major bourses fell around -5% from the September highs, and US Treasury yields backed up to above 1.50%. WTI crude oil approached levels not seen since 2008 and Brent crude popped above $80/bbl. 

September 2021 Summary:

• The S&P500 had its worst month since March 2020 in September as seasonal headwinds came to light.
• Geopolitical and regulatory risks between the US and China have risen sharply in recent months.
• Global energy prices continue to surge alongside commodity markets, with the Bloomberg Commodity Index showing its most significant annual gain in over 40 years.
• IPOs in the US have already reached record levels for the year, with one quarter left to go.

US Equity Markets:

US equity markets saw broad-based weakness in September in what is the seasonally worst-performing month for the S&P500 historically, over both a ten and twenty-year period. September 2021 saw the worst returns of any month since the pandemic began in March 2020, while September 2020 was the second-worst performing month in the same period. The benchmark ended seven consecutive months in the green with a decline of -4.6% on a total-return basis. The Russell 2000 and Microcap indexes fared slightly better with declines of around -2.8%, respectively. Growth and Tech names were hit the hardest, with the Nasdaq losing -5.8%.

Chinese Factors:

Risk appetite soured from the potential systemic risk caused by the Chinese property giant Evergrande and its failure to make several payments to bondholders. At the same time, the Chinese government has been assertive in announcing new regulatory measures and crackdowns on specific sectors, which has raised concerns about further economic damage. There have also been reports of rolling power blackouts at homes and factories, which is impacting their economic data and growth forecasts. 

The US Fed:

US Federal Reserve Chair Powell noted that the central bank could begin scaling back its stimulus program as soon as the next meeting in November at the recent FOMC meeting. According to Powell, rate hikes would not likely begin until some time in 2022, after the tapering process is completed. He also changed the language around inflation, refraining from using the term 'transitory' to describe the outlook for inflation, which led some to speculate if the Fed thinks inflation is here to stay. CPI last printed at 5.3% in August, but the Fed believes there should be some relief in the first half of 2022 and that the inflation expectations are still at levels consistent with the 2% inflation target. 

Mergers & Acquisitions:

Q3 saw more than $1.5 trillion in global M&A deals, which is +38% on the previous year and set the highest quarter on record. The annual record for M&A deals has already been exceeded in the first nine months of the year, sitting at $4.3 trillion, where the previous annual record was $4.1 trillion set in 2007. So far in 2021, there have been a staggering 770 IPOs, approximately 3x the ten-year average of 205. 

Looking ahead:

There is one obvious reason to be cautious about the near-term outlook for equity markets in the months ahead, which is mainly due to rising bond yields. Highly valued growth and tech stocks are most sensitive to changes in interest rates, and the sharp increase in yields in late September highlighted this. Investors must apply more significant discounts to future earnings with higher interest rates, making companies with high forward PE multiples less desirable. As inflation expectations rise, the nominal yields on bonds follow suit, and this is likely to continue in the months ahead.

Our portfolios provided largely unremarkable performances for the month with Wealth-Builder being the noticeable outperformer as equities continued to do well.

Although inflation has come through strongly, recently deflationary concerns have resurfaced with the delta variant and slowing growth.  The bond market remains unphased by inflation for now, perhaps anticipating its “transient” nature and an economic slowdown or persistent policy support.

We remain concerned about medium-term economic prospects including the risk of stagflation, deflation without further stimulus, geopolitical risks, ongoing challenges to true profitability, and highly elevated market valuations, and are hence participating selectively in risk assets.  The greatest medium-term challenge for all portfolios is probably achieving returns without suffering unduly in continuing market crises; we are seeking to mitigate this risk in part by avoiding the worst of the market exuberance and greater alternatives allocations than most.  We continue to see the need for strong active management to produce acceptable risk/return trade-offs. 

We continue to look to diversify the portfolios where appropriate and sensible.  We continue to believe some meaningful exposure to assets such as precious metals is essential as a hedge to navigate the coming months if governments continue to provide massive stimulus while huge geopolitical, social and economic issues persist.  We note that economic and political risks remain very elevated globally and have recently attracted broader investor attention with the Afghanistan withdrawal a case in point.

Our Cash-Plus portfolio is very defensively positioned, while our Short-Term portfolio is relatively defensive, with both designed to be less volatile over shorter-term time periods than our longer duration portfolios.   

Our more medium and longer-term orientated portfolios target returns and manage risk with longer-term time periods in mind.  The Wealth-Builder’s larger risk tolerance gives us most leeway to back higher risk assets on the basis of our insights and research, while still managing risk prudently over a longer-term time frame; it is in many ways a flagship portfolio for DAC and has – along with our other portfolios - proven highly competitive with both liquid retail and institutional portfolios of a similar nature.  Active management in general has become more productive since COVID, despite large flows to more passive instruments.

DAC’s portfolios are designed to be diversified, but focus on investing where return prospects are assessed as capable of meeting the return objectives of the funds over their respective time horizons.  This diversification provides useful mitigation against risk over the appropriate time period consistent with each portfolio’s objective, while our active assessment of risk and return can target capital to where it appears most prospectively and appropriately placed.  In this way, we are much more forward-looking than a historical SAA approach which tends to be much more biased to what has happened (for example, by relying more upon past correlations and volatility which may be markedly different from the future).  We consider future scenarios actively and if there is a major regime shift, our approach should hence be much more capable inherently of adapting to different market conditions.  That said, the market outlook remains challenging for everyone currently, no matter what the approach.

Extraordinary monetary and fiscal stimuli have been implemented by central banks and governments, creating distortions and market interference.  The sheer size and extent of their actions is providing meaningful impacts on market returns and, in many cases, causing substantive dislocations from underlying company and economic fundamentals.  Over time, we expect these policies to be very supportive for certain portfolio positions and require dynamic management of others.  For example, and in particular, we hold meaningful weightings to ‘hard assets’ in different guises, and continue to expect these to provide valuable return and risk contributions over time, even if they are occasionally volatile.  We believe large and unsustainable debt burdens, poor government policies and market interference continue to strangle real productivity growth for much of the economy, albeit nominal growth has markedly improved.  This potentially bodes relatively poorly for traditional risk assets and index investing, upon which most traditional investment strategies and super funds are heavily dependent.  Furthermore, we think good active managers will better be able to differentiate themselves and add value over the next few years, in part by being more nimble and able to differentiate between assets based upon their prospects in different economic circumstances and very disparate valuations.

We continue to be concerned about asset prices.  We believe growth outcomes, geopolitical tensions and other risks and shocks pose further (unanticipated) risk to markets, potentially just as coronavirus has.  Indeed, it may take a market shock to end the current market rally given many investors appear to have become entirely valuation insensitive in the face of massive stimulus.  We hence think investors are best served by thinking outside the box in order to better protect and grow their capital, including potentially greater use of liquid value-adding alternatives (selectively chosen), discounted listed investment companies (selectively chosen and now more difficult to identify), along with precious metals exposures and greater weightings to real assets.  We aim to remain astute, flexible, and highly risk-aware and are invested in liquid assets whose weightings we can adjust over time to respond to an ever-changing and potentially highly challenging investment climate.