Our portfolios had some losses over the month as both bond and stock markets globally sold off. Inflationary concerns have the attention of the market with interest rate concerns front of mind. Central bank policy now poses a major risk to markets with the FED and other central banks reacting to inflation.
We remain concerned about the medium-term market and economic prospects, including the significant risk of inflationary pressures persisting, possible Central Bank policy mistakes, stagflation/recession, heightened geopolitical risks with possible further deterioration, ongoing challenges to real economic growth and deteriorating corporate profitability. Despite this, we still see elevated market valuations in part and are hence participating very selectively in risk assets. The greatest medium-term challenge for all portfolios is achieving returns without suffering unduly as markets derate with the reality of our fundamentals - challenged political and economic circumstances amidst high market valuations. 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, precious metals 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 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. Nonetheless, even here, we are being cautious currently and have lowered market exposures in recent months.
Our 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 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). Although past performance is not indicative of future performance, our highly competitive results to date have provided some validation of our approach historically.
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 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 aim to remain astute and flexible, and highly risk-aware in an ever-changing and potentially highly challenging investment climate as 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.