The portfolios were largely up for the month in what was a very strong month for risk assets.
Subsequent to month end, the risk-on rally has escalated. Investor optimism about vaccines and central bank and fiscal support for markets remains despite worsening COVID-19 case counts and lockdowns worldwide. Markets have disregarded - for now - substantial and growing problems with debt, wealth inequality, and meaningful political unrest. We believe the market is probably being too optimistic about the outlook.
We remain concerned about medium-term economic prospects including the risk of stagflation and rising inflation (the latter is now a more consensus view), geopolitical risks, ongoing challenges to true profitability, and elevated market valuations, and are hence participating very selectively in risk assets and seeking some diversification. The greatest medium-term challenge for all portfolios is probably achieving returns without suffering unduly in continuing market crises; we are seeking to avoid the worst of the market exuberance. We continue to look to diversify the portfolios where able 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 political, social and economic issues persist. We note that economic and political risks remain very elevated globally, albeit they are being ignored for now. We prefer precious metals to overpriced bonds over the medium-term and believe investor portfolios may depending upon the path forward from here - increasingly turn away from bonds given their extremely low yields and potential susceptibility to debt, currency and sovereign crises, and 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. That said, the market remains challenging for everyone currently, no matter what the approach.
Extraordinary monetary and fiscal stimuli continue to be implemented by central banks and governments. 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 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 for much of the economy, albeit nominal growth may improve. 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 could see the current deflationary market environment morph in to a stagflationary or reflationary outcome over time as we eventually recover from this shock, albeit this may depend on (as yet unknown) policy actions. This potentially bodes poorly for some interest rate sensitive assets such as bonds. Furthermore, we believe geopolitical tensions and other risks and shocks pose further (unanticipated) risk to markets, potentially just as the 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), 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 potentially highly challenging investment climate.