The portfolios all had positive results during the month.
Markets have remained sanguine, with a continuing risk-on rally driven by continuing government intervention in markets and economies and confidence in the same, some investor exuberance, investor optimism about vaccines, and improving growth. Markets have disregarded - for now - substantial and growing problems with debt, uncertainty heading into US elections, wealth inequality and social and political disharmony.We remain very concerned about medium term economic prospects including the risk of stagflation and deflation, political risks, ongoing challenges to true profitability, and elevated market valuations, and are hence participating very selectively in risk assets. The greatest medium-term challenge for portfolios will be achieving returns without suffering unduly in continuing market crises; we are seeking exposures where we believe the prospects are most positive and valuations appear fair.
We continue to look to diversify the portfolios where sensible. We continue to believe some meaningful exposure to assets such as precious metals is essential to navigate the coming months if governments continue to provide massive (and unsustainable) stimulus while huge issues persist. We note that economic and political risks remain very substantive globally. Precious metals exposures have notably been the best performing assets we’ve owned in the last couple of years, and are notably a non-traditional exposure for diversified funds, while having been a core position for us. We prefer precious metals to overpriced bonds and believe investor portfolios may – depending upon the path forward from here - increasingly turn away from bonds given their extremely low yields and susceptibility to rising inflationary pressures over time.
Our Cash Plus portfolio is very defensively positioned, while our Short-Term portfolio is relatively defensive, with both designed to be more protective 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.
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 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.
Extraordinary monetary and fiscal stimuli continue to be implemented by central banks. The sheer size and extent of their actions is providing meaningful impacts on market returns and, in some cases, 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 expect these to provide valuable return and risk contributions over time, even if they are occasionally volatile. We believe real growth may be very slow in future as the large and unsustainable debt burdens, poor government policies and market interference continue to strangle real productivity growth. This 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, in part by being able to differentiate between assets based upon their prospects in different economic circumstances.
We could see the current deflationary market environment morph in to a stagflationary outcome over time as we eventually recover from this shock, which potentially bodes poorly for some interest rate sensitive assets and potentially broader market exposures across bonds, property and equities over time. Furthermore, we are concerned about geopolitical tensions and other risks and shocks posing further unanticipated risks to complacent markets, as the coronavirus has. Indeed, it may take a market shock to end the current market rally and bubble given many investors appear to have become entirely valuation insensitive in the face of massive stimulus. Some illiquid assets such as commercial property may be particularly poorly placed given the likely valuation changes resulting from the coronavirus, including less need for office space and higher unemployment. 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 and credit securities (very selectively chosen), along with precious metals exposures. We aim to remain astute and flexible and highly risk aware and are invested in liquid assets whose weightings we will adjust over time to respond to an ever changing and likely highly challenging investment climate.