Our portfolios were all very positive for the month and have demonstrated better capital preservation in recent months than many, as we are emphasising genuine diversification at a portfolio level and keeping our positioning conservative in what we still believe to be a bear market with further downside risk into 2023.
We continue to believe that over the medium-term, inflation pressures will remain volatile, while real economic growth will remain weak given a relative paucity of productive investment and large debt loads for many economies. We are still very concerned by geopolitical risks and the massive challenges to the previous period of globalisation and peaceful prosperity. We aim to remain astute, flexible and highly risk-aware in an ever-changing and potentially highly challenging investment climate.
2023 sees the risk of an economic and earnings recession and its attendant impact on markets as persistent central bank tightening and structural challenges impact markets with a lag.
Given our outlook, we see the need for precious metals and selective commodities such as energy and resources allocations in portfolios and a more diversified approach than what is commonly relied upon by our industry. We will look at judiciously increasing equity and credit exposures sometime in 2023 when we assess a more favourable valuation and outlook. Currently, capital preservation and prudent diversification is more important.
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 – while being designed 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 the most leeway to back higher-risk assets based on our insights and research while still managing risk prudently over a longer-term time frame through dynamic asset allocation. In our longer-dated portfolios, we are relatively conservatively positioned for now, which gives us significant scope to increase equity positioning in coming months as opportunities present themselves.
Dynamic Asset’s portfolios are designed to be diversified but focus only 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 who tend to be much more focused on what has happened and what industry peers are doing, which is to typically build portfolio asset allocations by relying more upon past returns, correlations and volatility - which we believe are under threat as conditions are markedly different today from the past 10-20-30 years.
We are better diversified than most typical portfolios by holding meaningful weightings to alternatives and ‘hard assets’ in different guises and expect these to provide valuable return and risk contributions over time, even if they are occasionally volatile individually. 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 world 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. The increasing risk of major conflicts gives further credence to our concerns. We think investors are best served by researching thoroughly and thinking more broadly and 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, flexible and highly risk-aware in an ever-changing and potentially highly challenging investment climate, and will continue to look to take advantage of the volatility, uncertainty and fear to add value to the portfolios through time.