Dynamic Asset portfolios all had excellent results in what was an otherwise modest returning month for markets.
Markets have remained constructive, with a continuing risk-on rally driven by continuing government intervention in markets and economies and confidence in the same, and investor optimism about vaccines, improving growth and the opening up of economies.
Markets have disregarded for now substantial and growing problems with debt, wealth inequality and social and political disharmony.
We remain cautious on economic prospects, ongoing challenges to true profitability, and elevated market valuations, and are hence participating somewhat carefully in the ongoing market rally. Nonetheless, we realise it is important to achieve returns and are seeking returns where we believe the prospects are most positive and valuations appear fair.
The 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 time, while our active assessment of risk and return can target our capital to where it appears appropriate in line with each portfolio’s specific objectives.
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 produced excellent results during July. Their design targets returns and manages risk over longer term time periods, with the Wealth Builder’s larger risk tolerance giving us most leeway to invest into higher risk assets
on the basis of our insights and research, while still managing risk prudently over the longer term time frame.
We continue to look to diversify the portfolios where sensible. We remain positive that a meaningful exposure to assets such as precious metals is essential in navigating the coming months if governments continue to provide massive (and unsustainable) stimulus while huge issues persist. We note that economic and political risks remain very significant globally. Precious metals exposures have notably been the best performing asset we’ve owned in the last couple of years. While having been a core position for us it is a non-traditional exposure for diversified funds, providing a point of differentiation with how we are positioning ourselves to achieve our risk-return outcomes.
Extraordinary monetary and fiscal stimuli continue to be implemented by central banks. The sheer size and extent of their actions is providing meaningful impacts on market returns and, in some cases, 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 and government policies and market interference continue to strangle real productivity growth. This bodes relatively poorly for traditional risk assets, 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, in part by being able to differentiate between assets based upon their prospects in different economic circumstances.
We could see the current deflationary market environment morph in to a stagflationary outcome over time as we eventually recover from this shock, which potentially bodes poorly for some interest rate sensitive assets and potentially broader market exposures across bonds, property and equities over time. Furthermore, we are concerned about geopolitical tensions and other risks and shocks posing further unanticipated risks to complacent markets, as the coronavirus has. Indeed, it may take a market shock to end the current market rally given many investors appear to have become valuation insensitive in the face of massive stimulus. Illiquid assets such as commercial property look particularly poorly placed given the likely changes resulting from the coronavirus including less need for office space and higher unemployment. 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), discounted listed investment companies and credit securities (very selectively), along with precious metals exposures. We aim to remain astute and flexible and are invested in liquid assets whose weightings can be adjusted over time to respond to an ever changing and highly challenging and uncertain investment climate.