Our portfolios were down modestly over the month despite the aggressive equity market sell-off with the invasion of Ukraine. This reflects our current defensive positioning to help protect capital.
Inflationary concerns also have the attention of the market with supply chain issues becoming more acute, particularly in areas affected by war, and wages pressures growing. Central bank policy now poses a major risk to markets with the FED perhaps feeling ‘forced’ to finally react to inflationary risks.
We remain concerned about medium term market and economic prospects including the risk of stagflation, inflationary pressures persisting longer than expected, recession and then deflation, geopolitical risks, ongoing challenges to real growth impacting sustainable profitability, and elevated market valuations. We are therefore participating very selectively in risk assets. The greatest medium-term challenge for any portfolio manager is achieving returns without suffering unduly as the reality of our fundamentals - challenged economic circumstances amidst high market valuations - becomes an issue again leading to potentially significant selloffs in markets. We are seeking to mitigate risks such as these by avoiding the worst of the market exuberance, diversifying with meaningful alternatives and selective commodities and resources allocations, all of which have been very helpful in recent months. We continue to see the need to have lower equity market risk, greater diversification and strong active management to produce acceptable risk/return trade-offs.
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.
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 the 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.
We are better positioned for inflation than most as 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 for now. This potentially bodes relatively poorly for traditional risk assets and index investing, upon which most traditional investment strategies and super funds are heavily dependent. 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 more upon past correlations and volatility - which may be markedly different from the future). We 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), along with precious metals exposures and greater weightings to real assets. 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.