Rather than give the usual economic update I thought it would be prudent to inform you of our
positioning and to try and explain what is going on from where we sit with portfolios and assets
generally, especially as returns are underwhelming. There is no doubt that we are, as we have been
saying, at the end of the party as far as the economic cycle goes and we are currently in what we refer
to “scarcity of returns phase” (see chart below) and about to enter (by year end) capital preservation
phase. The global cycle (see chart to left below) goes through four distinct phases and it is an ongoing
roller coaster which is directly linked to the fortunes of investors and the pace at which we transition
speeds up and slows down as it progresses. We as advisers taking those investment decisions on behalf
of our clients and we are always faced with a complex combination of analysis and interpretation and
we look at quantifying the different stages in the cycle. Some of us cyclically rotate our portfolios and
other just go long hold and ride the roller coaster.
From our perspective we want to take the most risk for clients towards the end of the capital
preservation phase (which will be when the markets are looking very bad and losses quite significant on
the indices) because that is when from our perspective the risk will be rewarded and the least risk as we
go through scarcity of growth .Today we have reduced risks but still have participation and as we enter
capital preservation we will try and take even less risk. The key is to reduce equity, reduce risk and lock
in gains and then take risk when we feel the economic cycle will reward us by cyclically adjusting the
asset allocation so we rotate between low risk high quality and high quality low risk assets, and that is
not easy. Today we are getting increasingly towards the point as noted in the two charts below where
the equity markets are going to capitulate and we are rotating into low risk high quality assets and using
fund managers that have the ability to diversify their portfolios but it does not mean there is no risk.
What are we seeing and what does it mean?
We are at the point when the variation in returns between high risk and low risk assets is nil which
means that risk is not being rewarded neither is being defensive which means nothing is being reward
imminent correction in the coming weeks, but we need to watch the data very closely. The risks are high
and the Investment Committee Meeting will set the groundwork to ensure by year end the portfolios
have as much defensive positions as we can take so we give the fund managers the greatest amount of
flexibility to adjust as the environment changes.
For anyone who wants further economic data please review the attached Global Economic News
Model Portfolios & Indices
Over the last week we have seen most of the indices that we track fall with the continued fears over the
trade wars concerns. China is having the worst fall and Asia markets fall further when the markets closed
this morning, following news that China plans on asking the World Trade Organisation (WTO) for
permission to impose more than $7bn in sanctions against the US. This move has further spooked
investors and business which are already worried about a possible escalation in the trade war between
the world’s two largest economies. It is argued in the markets that China will be the cause of the next
financial crisis. China is a great source of global growth and it is an absolute economic miracle over how
the country is providing so much positivity into the markets.
With our model portfolios, with the way they are designed and the unique nature of adapting a fund of
funds, we can manipulate the asset allocation to the way we need it to be by cyclically adjusting the
model portfolios based on the economic cycle. Therefore, the fall in the portfolios is correlated to the
drop-in performance, however we are able to limit the downside by protecting the assets with the
capital preservation mandate we have adopted. The drop is only based on the current market risks,
however as the strong economic data continues to feed itself into the markets, we could see markets
edging higher and higher. High market risks have led investors towards safer assets, such as the
Japanese Yen and US Government Bonds. We remain invested with our current asset allocation as we
still see some upside in the markets from our research and the evidence in the numbers. It is absolutely
certain for us to keep a close eye on the markets, as this will be the point when we will need to alter the
asset allocation and the types of assets we hold to ensure we are protecting clients’ capital, as well as
finding opportunities in the market to reach the targeted annualised returns for each model portfolio.
The data above will not directly correlate to the indices as there is always a delay in pricing because the US
markets close significantly later than the European markets and the Asian markets. The data set above reflects
the last close and much of the day’s movements will not yet be reflected in the portfolios due to pricing delays.
You cannot therefore directly correlate indices to the portfolios. The value of investments may fluctuate in price
or value and you may get back less than the amount originally invested. Past performance is not a guarantee of
future performance. Performance figures quoted include the fund manager charges but exclude other fees such
as adviser, custodian, switch and/or discretionary investment management fees. Unless otherwise instructed
and accrued, income is reinvested into the portfolio.
This Day in History
On this day in 1940, Marcel Ravidat, finds a narrow entrance into a series of caves beneath the fields of
Dordogne, France, and comes back with three friends to explore the subterranean world. The Lascaux
cave was found! They gaze upon the vivid Lascaux cave paintings that experts will later date to over
17,000 years old.
As always have a wonderful week and stay safe.