The portfolios provided mixed results in what was a mixed month for markets.
Markets are becoming more discriminating and digesting the prospects for different assets, with a continuing risk-on rally driven by easy liquidity and the return of speculative retail investors in the US, continuing government intervention in markets and economies, and investor optimism about the opening up of economies, with the latter being overly sanguine.
We remain very cautious on economic prospects, ongoing challenges to true profitability, and elevated market valuations, and are hence too risk orientated to fully participate in any ongoing speculative market rally due to the current uncertainties and risk management taking precedence in our approach. Nonetheless, we are seeking returns where we believe the prospects are most positive.
We continue to look to diversify the portfolios where sensible. We anticipate our meaningful exposure to assets such as precious metals could prove very useful in navigating the coming months if governments continue to provide massive (and unsustainable) stimulus. We note that economic and political risks remain very substantive globally. Precious metals exposures have notably been close to the best performing asset we’ve owned in the last couple of years, and are notably a non-traditional exposure for diversified funds while having been a core position for us.
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 soft returns during June. 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 back higher risk assets on the basis of our insights and research, while still managing risk prudently over the longer term time frame.
The portfolios are designed to be diversified, and look to invest 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, and in particular the risk of permanent capital loss, while our active assessment of risk and return can invest prudently and meaningfully where it appears appropriate in line with each portfolio’s specific objectives.
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 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 precious metals 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, by being able to differentiate between assets based upon their prospects in different economic circumstances.
We could see the current deflationary market environment morph continue or 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 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 (selectively), along with precious metals exposures.
We aim to remain astute and flexible and are invested in liquid assets whose weightings can and will be adjusted over time to respond to an ever changing and highly challenging and uncertain investment climate.