Most of our portfolios provided positive performances for the month, ending the financial year with very strong returns overall.
Although inflation has come through strongly economically, recently deflationary concerns have resurfaced with the delta variant making more of an impact. The bond market remains unphased by inflation for now, perhaps anticipating its “transient” nature and an economic slowdown due to COVID related factors.
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 periodic 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 are 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.
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 has – along with our other portfolios - proven highly competitive with both liquid retail and institutional portfolios of a similar nature. As active management has become more productive since COVID, we have seen a positive performance gap between us and our competitors.
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 relevant 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 more traditionally managed portfolio based on a more fixed Strategic Asset Allocation approach which tends to be much more biased to what has happened may be markedly different from the future. We consider future scenarios proactively 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 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 provide 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 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 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.