We had good performances again in all of our portfolios in April. We continue to demonstrate lower volatility in our portfolios than many, as we are emphasising genuine diversification at a portfolio level and keeping our positioning balanced. Investing too fully in risk assets at this stage of the economic cycle – as we believe many are doing - is fraught with risk, and won’t be able to take advantage of any market weakness to boost returns from dynamic asset allocation. There is noticeable market crowding again in large global technology names, which may lead index-like investors to significant disappointment as the year progresses.
Real economic and earnings growth will likely remain weak given current monetary policy settings and into a likely recession or softening economy at the very least. This may begin to be priced into markets as persistent central bank tightening and structural challenges impact markets with a lag. Given the macroeconomic backdrop, this would likely provide an outstanding opportunity for our portfolios to shine over the next two years.
Given our medium-term outlook, we see the need for some alternatives, precious metals and other commodities in portfolios and a more diversified approach than what is commonly relied upon by our industry. We will remain fleet of foot and look at judiciously increasing traditional financial (mainstream equity and credit) exposures sometime in 2023 if we ascertain a more favourable valuation and outlook for these assets. We believe that 2023 will be a year full of opportunity for us to tilt the portfolios favourably and thank our clients for sticking with us at this important time.
Our Cash-Plus portfolio is 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 – while being designed for shorter-term liquidity needs. Higher cash rates have improved the prospective returns for these portfolios, and they continue to perform well and in line with their benchmarks.
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 based on our insights and research, while still managing risk prudently over a longer-term time frame through dynamic asset allocation. There is significant scope here to increase equity positioning in the coming months as opportunities present themselves, but we are relatively conservatively positioned for now, given prominent market risks and short-term earnings outlooks.
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 believe we are much more forward-looking than most diversified managers who tend to be much more biased toward industry peers and what has happened (for example, by relying more upon static weightings, past returns, correlations and volatility), which we believe are markedly different from today’s conditions.
We are better diversified than many portfolios because we hold meaningful weightings to alternatives and ‘hard assets’ in different guises, and expect these to provide valuable return and risk diversification over time in our portfolio context, even if they are occasionally volatile individually. We believe large and unsustainable debt burdens, demographics, poor government policies and market interference continue to strangle long-term real productivity growth for much of the world economy. 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 are very concerned by geopolitical risks and the massive challenges to the previous period of globalisation and peaceful prosperity. The increasing risk of major conflicts gives further credence to our concerns. We think investors are best served by researching thoroughly and thinking more broadly and outside the box to better protect and grow their capital, including potentially greater use of selectively chosen value-adding liquid alternatives, along with precious metals exposures and greater weightings to real asset proxies.
We aim to remain astute and flexible, and highly risk-aware in an ever-changing and potentially highly challenging investment climate, and will continue to look to take advantage of our research effort and the volatility, uncertainty and irrationality of markets to add value to the portfolios through time.