Dynamic Asset had strong performances across all our portfolios in August in what was a weak month generally and for our competitors. This is further evidence our strategy of diversification and differentiated assets is achieving the desired outcomes.
We continue to emphasise genuine diversification at a portfolio level and keeping equity weightings low ahead of greater weakness in the economy and equity markets, given the significant risk of this occurring. History backs our position. Chasing markets and investing too fully in fully priced risk assets ahead of higher recession risk – which appears to be the most common positioning - is fraught with risk and won’t be able to take advantage of any market weakness to boost returns from dynamic asset allocation.
Real economic and earnings growth will likely become weaker given current monetary policy settings and into a likely recession or softening economy at the very least late this year or early in 2024. 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 Dynamic Asset’s portfolios to shine over the next year and two.
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. Precious metals tend to do very well in recessions comparatively. Uranium is fundamentally looking very strong and is less economically dependent. We believe that the coming years will provide significant opportunity for us to benefit from our positioning in real assets like these.
Our Cash Plus portfolio remains defensively positioned, while our Short-Term portfolio is also relatively defensive, with both designed to be less volatile over shorter-term time periods to help meet short-term liquidity needs or to simply protect capital. Higher cash rates have significantly improved the prospective returns and relative risk/return outlook for these portfolios, which have provided competitive after-fee returns to less liquid and administratively challenging options such as term deposits.
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 various risk assets on the basis of our insights and research, while still managing risk prudently over a longer-term time frame through dynamic asset allocation and diversification.
Generally speaking, we remain relatively conservatively positioned in equities, for now, given prominent market risks, but believe that the outlook for the stocks and commodity positions we hold to be excellent over the medium-term. In particular, many commodities that are facing significant increases in demand for the electrification of our energy systems appear likely to suffer from undersupply in coming years due to a lack of capital investment, ironically caused by the same groups that are calling for more electrification to protect the global environment.
The main challenge to a strongly positive outlook for commodities is a significant and very protracted recession, which is very unlikely in our view, given policy settings would likely be adjusted if that were to occur. Interestingly, this scenario would also allow us to take advantage of weaker equity markets and take advantage of any upswings that occur during the recovery phase. In contrast, much of the market, and many fund managers, are chasing some stocks, such as current market darlings in AI, which are priced for perfect outcomes to ever higher prices. Notwithstanding the long-term potential of AI, we believe this could end very badly for most investors in an economic downturn.
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 and in reasonably priced assets. 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, and 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, although AI may provide some relief and competitive benefits for some businesses over time.
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 in order 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 expect precious metals to do very well comparatively in recession and are maintaining our meaningful positions for this reason.
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.
Over the last year, we have increased our positioning in high-quality credit, bond and cash as we want to provide relative protection in the (not unlikely) event of a hard-economic landing - rather than the goldilocks scenario that the market is currently pricing and which is possible but unlikely historically given central banks fight against inflation. We have also identified outstanding value and expressed continuing confidence in select commodities such as uranium.
Over time, we expect volatile inflation outcomes will better serve our more diversified portfolio’s positioning - including our real asset and commodity positioning – than the narrower and less differentiated traditional portfolio. The latter is much more dependent currently on equity performance alone, outperforming historical comparisons in volatile inflation and economic conditions, which is a gambit that need not overwhelming dominate a diversified portfolio’s outcomes, particularly when other assets are genuinely attractive.
It feels like the time to shine for our approach to portfolio management is beginning, and we look forward to sharing the journey with you.