We had mixed performances in our portfolios in September in what was generally a very weak month for asset markets, including equities and bonds. Our short-end defensive portfolios held up well, as they are designed to, while longer-dated portfolios were more exposed to the broader markets, although held up relatively well.
We remain very concerned by geopolitical risks and the massive challenges to the previous period of globalisation and peaceful prosperity. The increasing risk of major conflicts – which we have regularly highlighted before the recent Middle East situation - gives further credence to our concerns. Real economic and earnings growth will likely become weaker given current monetary policy settings and likely result in a recession, or softening economy at the very least, late this year or early in 2024. This may begin to be priced into markets as financial market tightening and structural challenges impact markets with a lag.
To this end, we continue to emphasise genuine diversification at a portfolio level and keeping equity weightings low, given the significant risk ahead of greater weakness in the economy and equity markets. Chasing markets and investing fully in highly priced risk assets ahead of high risk of recession – which appears to be the most common positioning - is fraught with risk and won’t position you to take advantage of any market weakness to boost returns from buying in at lower levels. History backs our strategy and positioning.
We think investors are best served by researching thoroughly and thinking more broadly and outside the box 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 expect precious metals to do very well comparatively in recession, and geopolitical events are maintaining our meaningful positions for this reason.
Given the macroeconomic backdrop and our medium-term outlook, we see the need for some alternatives, precious metals and other commodities in portfolios and a more diversified approach than what is commonly relied upon by our industry. For example, precious metals tend to do very well in recessions and geopolitical events comparatively; uranium is fundamentally looking very strong and is less economically dependent. In particular, many commodities appear likely to suffer from undersupply in coming years unless a recession is very protracted (a protracted recession is very unlikely in our view, given likely policy reactions should a recession begin). In contrast, some mega cap stocks are priced optimistically today and are being treated as safe havens, perhaps mistakenly.
We believe that our approach of using Dynamic Asset Allocation and having flexibility within our mandates will provide significant opportunity in the coming years for investors to benefit from our approach and real asset selection, providing an outstanding opportunity for Dynamic Assets portfolios to shine over the next few years.
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 and in reasonably priced assets. 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 biased toward industry peers and what has happened (for example, by relying more upon static weightings, and past returns, correlations and volatility - which we believe are markedly different from today’s conditions).
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. Higher cash rates have significantly improved the prospective returns and relative risk/return outlook for these portfolios, and they have provided highly competitive returns in recent times. Short-Term, in particular, may be attractive to some risk-averse investors, if suitable to their needs.
Our more medium and longer-term orientated portfolios manage risk and target returns with longer-term time periods in mind. Wealth Builder’s larger risk tolerance gives us most leeway to back various risk assets based on our insights and research, while still prudently managing risk over a longer-term time frame through dynamic asset allocation and diversification.
Broadly speaking, we remain relatively conservatively positioned in equities for now, given prominent market risks, but believe that the outlook for the stocks we do hold and our commodity positions over the medium term to be excellent. We are better diversified than many portfolios because we hold meaningful weightings to alternatives and ‘hard assets’ in different guises, and expect these to provide valuable return and risk diversification over time in our portfolio context, 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, although AI may provide some relief and competitive benefits for some businesses over time.
We work diligently on behalf of our investors 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 our research effort and the volatility, uncertainty and irrationality of markets to add value to the portfolios through time. Over the last year, we have increased our positioning in high-quality credit, bond and cash as we want to provide relative protection in the (not unlikely) event of a hard-economic landing - rather than the goldilocks scenario that the market is currently pricing and which is possible but unlikely historically given central banks fight against inflation. We have also identified outstanding value and expressed continuing confidence in select commodities such as uranium.
Over time we expect volatile inflation outcomes will better serve our more diversified portfolio’s positioning - including our real asset and commodity positioning – than the narrower and less differentiated traditional portfolios. The latter is much more dependent currently on equity performance alone outperforming historical comparisons in volatile inflation and economic conditions, which is a gambit that need not overwhelming dominate a diversified portfolio’s outcomes, particularly when other assets are genuinely attractive. We continue to offer market leading defensive options in our shorter-term portfolios, for those preferring these, and competitive historical longer-term returns in all our portfolios (past performance is not a predictor of future performance, particularly currently). We also feel our time to shine more broadly across the portfolios is very close indeed.