Our portfolios posted modest returns over the month as low equity allocations kept returns modest in the face of rallying equity markets. The market is fluctuating between inflation and growth concerns as the short-term outlook remains unknown.
We continue to believe that over the medium-term, inflation pressures will likely remain somewhat elevated compared with recent decades and that financial repression will be the preferred path forward for central banks (keeping yields lowish and positive inflation and asset pricing). This is because the alternative of a deflationary collapse is highly undesirable to policymakers. We expect it won’t be long (weeks or months) until policymakers signal a less hawkish stance towards markets feeling forced to do so in the face of political pressure, slowing economies and/or further economic crises. Hence, we see the need for precious metals and selective commodities such as energy and resources allocations in portfolios. We are more interested in looking to increase risk asset positioning judiciously on any sell-off than selling after losses.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 and for shorter-term liquidity needs.
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. There is scope here to increase equity positioning in the coming months as opportunities present themselves.
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, which tend 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 many over the medium term 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, demographics, poor government policies and market interference continue to strangle long-term real productivity growth for much of the 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. 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 selectively chosen value-adding liquid alternatives, along with precious metals exposures and greater weightings to real asset proxies.
We aim to remain astute and flexible, and highly risk aware in an ever-changing and potentially highly challenging investment climate. We continue to look to diversify the portfolios where appropriate and sensible.