We had mixed performances in our portfolios in February among weak market returns for bonds, equities and commodities. We continue to demonstrate better capital preservation in recent months than many, as we are emphasising genuine diversification at a portfolio level and keeping our positioning conservative in what we still believe to be a risky market for investing too fully in risk assets.
We still continue to see that inflation is an issue over the medium term, while real economic growth will likely remain weak given current monetary policy settings. We are still very concerned by geopolitical risks and the massive challenges to the previous period of globalisation and peaceful prosperity. We aim to remain astute, flexible and highly risk-aware in an ever-changing and potentially highly challenging investment climate.
2023 still sees the risk of an economic and earnings recession and its attendant impact being priced into markets as persistent central bank tightening and structural challenges impact markets with a lag.
Given our outlook, we see the need for some precious metals and selective commodities such as energy and resources allocations 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 equity and credit exposures sometime in 2023 if we ascertain a more favourable valuation and outlook for these assets. Currently, capital preservation and prudent diversification are most important in our view in what is a volatile market month to month.
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.
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 through dynamic asset allocation. There is significant scope here to increase equity positioning in coming months as opportunities present themselves, but we are relatively conservatively positioned for now, given our outlook.
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 to 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 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 aim to remain astute, 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.