Our portfolios were mostly down over the month as bonds and equities markets sold-off.
Inflationary concerns have garnered the attention of the market with supply chain issues persisting and wages pressures growing. Central bank policy now poses the major risk to markets with the FED forced to react to inflationary risks as it appears to be “behind the curve”.
We remain concerned about the medium-term market and economic prospects, including the risk of stagflation, inflationary pressures persisting, recession and deflation, geopolitical risks, ongoing challenges to real growth and sustainable profitability, and highly elevated market valuations, and hence participating selectively in risk assets.
The greatest medium-term challenge for all portfolios is probably achieving returns without suffering unduly in future market crises as the reality of the fundamentals - challenged economic circumstances amidst high market valuations - becomes an issue again.
We are seeking to mitigate risks such as these and inflationary pressures in part by avoiding the worst of the market exuberance and with meaningful alternatives and selective commodities and resources allocations. We continue to see the need to have lower market risks, greater diversification and strong active management to produce acceptable risk/return trade-offs.
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 Builders' larger risk tolerance gives us leeway to back higher risk assets based on our insights and research while still prudently managing risk over a longer-term time frame.
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 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 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. 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 continue to be very concerned about high asset prices. 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. We aim to remain astute and flexible, and highly risk-aware in an ever-changing and potentially highly challenging investment climate.