Market volatility and the Passive Vs Active debate
Past performance is not a guide to future performance. Do you twist or stick with your asset allocation?
Sticking (passive management) versus re-balancing and scrutiny from the active manager brigade.
Daniel Jolliffe at Quilters Cheviot- lives the problem: “ Investment Managers find themselves having to ‘twist’ when it comes to tweaking our exposure to asset classes, to adapt to the changing macro-economic landscape “
Phil Smeaton, VAM/Sanlam: “ The drivers of 2021’s performance appears to be done… “. Opportunities around- skill required.
Lorenzo La Posta at Momentum: “We have a constructive view on equities and on value stocks, trading at lower multiples than growth names and offering better protection against inflation and tighter monetary policy. “
La Posta: “ also positive on real assets such as infrastructure and real estate, both providing reliable sources of income and a higher degree of inflation protection. “
Jolliffe: Quilters Cheviot- “ have sought to diversify our allocation to Alternatives. Alternatives include Absolute Return Funds, Commodities, Infrastructure, Property and Private Equity. We have increased our exposure to investments in these areas to reduce the correlation of the portfolio to the performance of global equity markets.”
Asset Allocation: stick or twist for 2022?
One investment line heard to the point of ad nauseum , might be :“Past performance is not a guide to future performance”. This month’s piece is based on this thought: why do regulators insist on that statement, or its half-sister “your capital is at risk”? After a year of double-digit equity returns, a year in which the S&P 500 achieved more than 50 new highs, it might seem like listening to your grandmothers “be careful” advice after the sensations of a bungy jump in the middle of a paragliding course.
Yet, what we know so far this year is: the same S&P 500 for Jan 2022 has a YTD figure of minus 7.01% with 1 day left (although comfortable at +19.32% for the 12 months to the same date). More importantly, the forecasts of our Herd of research departments have a slightly different sound about them than for most of 2021. The “past performance” refrain is one of the reasons why “re-balancing” of portfolios is a habit of professional/sophisticated investors. So, to our point: should you be changing asset allocation? Twisting rather than sticking?
THE CASE FOR STICKING: THE PASSIVE INVESTOR.
If you have been riding the TINA wave (There Is No Alternative) to equity investing, the current bull market has delivered fantastic returns. In rising markets investing in indices such as the S&P 500 or versions of The FAANGs (Facebook, Amazon, Apple, Netflix and Google-and the latter’s variations) will have been rewarding.
Passive investment and online investment channels have been making hay because the sun was shining. Mondial, like others, will have jumped on the cheap ETF market indices band wagon simply because by both price and ease of management it made sense.
With 2022 looking as if volatility is a certainty, we would remain confident that regular savers should continue (especially with new premiums) buying whilst prices provide opportunities. Another common refrain needs pulling out here: “when there is blood in the streets invest”- Rothschild.
However, for investors protecting capital (whether built from savings or started as a lump sum) the outlook provided by our research Herd counsels re-balancing.
THE CASE FOR TWISTING- RE-BALANCING AND ACTIVE INVESTING.
The Mondial September Newsletter began to highlight an increasing drift towards active management over passive management (“FAANGs- Baring their teeth or long in the tooth?”). As pointed out in that piece, 2020 S&P stats show that the FAANGs accounted for virtually all the S&Ps growth. In the 5 years to 2021 these few stocks accounted for 40% of the entire global equity market by value. None of our Herd of research advisers believed at that time that this was sustainable. The shape of the market had to change. This means that management was required as re-shaping evolved.
Since then- other factors, led by inflation (and Central Bank reactions); COVID and lockdowns effecting the clogging up of ports and logistical problems have added to the inevitability of structural change.
What do the Herd think now?
THE HERD VIEW- PREPARING FOR 2022:
Phil Smeaton at VAM/Sanlam starts his year-start piece attached ( 2022: A new Cycle of Economic Growth and renaissance”) with “the drivers of 2021s performance appear to be done”. Whilst Smeaton is positive about Equities in 2022- its more a case of “active” research-based decision making rather than the extreme ends of the equity spectrum. At one end: “Reddit Raiders” or what he calls “fantasy stocks” referring to the example of car manufacturer Rivian- who have “never made a car but was the second largest car maker below Tesla on the stock market”. At the other end, the expectation of continued growth with the worn out FAANGs. Nevertheless, Smeaton is a believer in equities from a distinctly active perspective “knowing where these opportunities and threats lie is going to separate the luck from the skill over the next 12 months.”.
Lorenzo La Posta at Momentum Asset Management has a cautiously optimistic view: “We expect the economic growth to continue into this year, driven still by the recovery from enforced inactivity and the release of post-lockdown pent-up demand. However, with covid variants dampening activity, consumers feeling the pinch of higher inflation and monetary and fiscal policies becoming less supportive, we think the peak rate of growth has now passed and the road ahead is going to be bumpier than last year.” That is a vote for re-balancing, review, and active over passive management.
La Posta continues his version of the Twist: “ We have a constructive view on equities and in particular on value stocks, trading at much lower multiples than growth names and offering better protection both against inflation and tighter monetary policy. We are also positive on real assets such as infrastructure and real estate, both providing reliable sources of income and a higher degree of inflation protection. We recognize the value of assets such as inflation protected bonds, precious metals and Chinese government bonds, whose diversifying characteristics are increasingly important to reduce overall portfolio risk, without sacrificing expected returns compared to typical defensive assets.”
Daniel Jolliffe at Quilters Cheviot takes his response to our question based on the asset manages fiduciary responsibility “ as custodians of other people’s wealth, Investment Managers have to adopt a long-term investment horizon and, to my mind, that means retaining conviction and sticking when it comes to asset allocation. However, I think that often, Investment Managers find themselves having to ‘twist’ when it comes to tweaking our exposure to asset classes, to adapt to the changing macro-economic landscape. For example, given the trajectory of interest rates, the capital growth prospects of Fixed-Income assets is flawed and will be for the foreseeable future. Therefore, for some time, my Co-Investment Managers and I have sought to diversify our allocation to Alternatives. Alternatives include Absolute Return Funds, Commodities, Infrastructure, Property and Private Equity. We have increased our exposure to investments in these areas in order to reduce the correlation of the portfolio to the performance of global equity markets. Therefore, despite the recent volatility in equity markets, I wouldn’t wish to deviate from our long-term view of Fixed Income and Alternatives. “
For more details, or to contact Sean Kelleher CEO, Mondial Dubai LLC, please contact us at
+971 56 2228 535