Our shorter-dated portfolios were down for the month as bond markets sold-off aggressively; however, our longer-dated portfolios performed strongly, in an absolute and relative sense, during difficult market conditions.
Supply chain issues caused by war and deglobalisation further stoked inflationary concerns have the attention of the market. Central bank policy now poses a major risk to markets, with the FED feeling forced to finally react to inflationary risks.We remain concerned about the medium-term market and economic prospects, including the risk of inflationary pressures persisting, stagflation leading to possible recession and deflation. Further deterioration in geopolitical risks and escalating conflicts are significant concerns and exacerbate the ongoing challenges to real growth, sustainable profitability, and elevated market valuations. We are seeking to mitigate risks such as these in part by participating selectively in risk assets and avoiding the worst of the market exuberance, but also through holding meaningful alternative allocations, selective commodities and resources allocations, all of which have been very helpful of late. We continue to see the need to have lower market risks, greater diversification and strong active management to produce acceptable risk/return trade-offs.
Overall, Dynamic Asset’s portfolios are designed to manage risk through sensible diversification where we focus on investing into a range of assets where the return prospects are assessed as capable of meeting the return objectives of the funds over their respective time horizons. In this way, we are much more forward-looking than the typical risk profile / SAA manager, which tends to be much more biased to what has happened historically, but which may be markedly different from the future.
Our Cash Plus and Short-Term portfolios are defensively positioned, with both designed to be less volatile over shorter-term time periods than our longer duration portfolios to help meet shorter-term liquidity needs.
Our medium and longer-term portfolios target CPI+ returns, which means we must participate in order to generate returns, but we do so judiciously as we manage risk with those 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. Nonetheless, even here, we are being cautious currently.
We are better positioned for inflation than most as we hold meaningful weightings to ‘hard assets’ in different guises. We 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 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 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.