Janus: the Roman god of doorways and new beginnings... backward reflections and forward insight...
Janus-to-January- a new beginning or same old story?
1. 2022- An endpoint which dissected the rationale from the irrational investor.
A wise-old asset manager told me: the three critical parts of portfolio management are “the starting point, the endpoint, and the management in-between”. 2022 was a year in which deep insight can be added to this apparently simple axiom. The reason being that 2022 performance results were so outstandingly poor that many investors – and notably inexperienced investors- cashed in their chips on the basis that markets are a gamble and the only thing that matters is the here and now. This is why inexperienced gamblers and inexperienced investors end up with similar results- their exit point tends to be one when prices are lower than all the other points. The gambler may not have an exit choice, but inexperienced investors are often obsessed with the hear-and-now to the point of making emotional decisions. Lesson one, in the transition from inexperienced-to-experienced investor, is the adage “you only lose by selling”. Yet, as the world of behavioural science grows, it seems that verbal adages are a weak form of advice. We must, I am told, lean on the world of behavioural science. The root of that subject is based on the abuse of the theory that humans are perfectly rationale. Instead, financial advisers must start learning the skills of “choice architecture” and getting into the weeds of our clients thinking to avoid decisions which lead to an “endpoint” nowhere near an optimal point. Frankly, the author is not of such patience (skill?) and sticks to the message drummed in Victorian teaching style: repeat 100 times: “2022 was part of the journey- it was a poor destination”. If it was the destination- arrgggh. A standout graph reflecting how poor 2022 was provided by Russell Asset Managers- Diagram 1- which shows that for the first time in over a decade both equities and bonds were negatively correlated. This means that there was no hiding place in the traditional 60-40 performance benchmark (60% equities 40% bonds).
Russell Asset Managers- 2022- negative correlation of equities and bonds.
2. 2022- “A brutal Year” – but a beautiful starting point?
For a fantastic wrap on 2022- read Momentum Asset Managers Global Markets Review & Outlook. CLICK HERE. We have taken their headline stats into our “Take-aways” heading. Where the brutality of 2022 fits into today’s narrative is in the line we have been peddling in our Newsletters for most of H2 of 2022, specifically, that 2022 (now 2023) as a “starting point” for new money has got to be compelling. OCTOBER NEWSLETTER. Back to the adages “when there is blood in the streets, invest”. 2022 was an absolute bloodletting for asset prices. 2023 – with a recession likely and with uncertainty in all things Russian, it can’t be taken as a likely boom year, but, hey, we can say that for investment purposes for new money it provides an exciting starting point because:
A. Mondial is not a speculator. We take all monies invested for less than 3 years as “speculation”. 2023 as a starting point for investment and not speculation is looking attractive.
B. Mondial is a medium to long-term financial adviser. The here-and-now is not of interest to “new money”.
For new money, we are gung-ho on investment with 5-year-plus scenarios. This starting point is as tasty as it has been for several decades. Add in the likely volatility providing an added attraction for averaging-in and regular savings plans, and you have a starting point with a nice bow wrapped around it.
Old money- a different story.
3. Between start and finish: the management in-between.
Having established that a good starting point is when prices are cheap, and a bad end point is when prices are cheap, what about the in-between bit? 2022 was a difficult “ management in-between year” and 2023 will continue into the tunnel of uncertainty although green shoots of lights from tunnel ends are roundly voiced.
Difficulty requires clarity of thought. The act of thinking was one of the more painful bits of 2022 not least because up to Dec 2021 the S&P 500, the engine of all risk assets, had been on a 15-year bull run. In such upward bursts, thinking is not required. Indeed, it can lead to injury. In 2022/2023, thinking is required. The comparison is important for managing capital and old money.
To help the thinking process we raise 3 thoughts:......
3.1 Equities- the right asset to fight inflation.
The excellent article from Quilter Cheviot CLICK HERE -, deals with the suggestion that equities present the logical “investment period” solution to inflation. The thinking required here is to off-set the negative results of 2022 against the idea that high price inflation is temporary but inflating equities over economic cycles is normal. The logic carries the support of Warren Buffet whose reply to a question on dealing with inflation was to “buy, buy, buy-equities”.
3.2 Bonds - the income asset of choice.
We also attach CLICK HERE - an article from Vanguard that states the medium-term case for carrying high-class debt into medium-term portfolios. Bonds have two components: a price return (capital) and a coupon from the interest rate. For Vanguard “the best way to think about bond returns for long-term investors is, therefore, the total return, i.e. price plus income return”.
3.3 Alternatives - the value of non-correlation and multi-asset management.
Increasingly, asset classes such as INFRASTRUCTURE have emerged as something to be relied upon as a non-correlated concept. Key features often include long term need, government support, income from fees and without waves of buying and selling emotion. The Russel Graph (Diagram 1) provides a good reason why anything not correlated to interest rates, equities, and bonds, was deemed to be attractive in 2022 and will remain attractive into 2023.
This takes us back to the “management in-between” problem and the current need to think. Alternatives are great non-correlators, but thinking is a major requirement. Which infrastructure should you invest in? The road in Australia or the hospital in Spain? This takes us into our conclusion. For the “management in-between years” at Mondial, we remain fixated on taking the easy-to-explain route. In this route, thinking is best done by asset managers with research departments equipped to deal with both specific asset class thinking and the more complex matter of mixing different assets into one portfolio for the purposes of protecting and growing wealth.
2022 was a harsh year for existing capital. A good year for starting and a painful one for thinking. It is, however, the need of the hour for performance management. For those needing some thinking pills contact us for a review at mariam.mikhail@mondialdubai.com who would welcome any discussion on issues arising from our articles and service.
Key Takeaways: Momentum “A Brutal Year”
2022-A brutal year with inflation and war headlining uncertainty.
The Federal Reserve’s policy shift of 4.25%, steepest in over 40 years.
The USD rose 8.2% on a trade weighted basis.
The JP Morgan Global Govt Bond index fell -17.8%
The MSCI Index of developed equity markets fell-18.1%
MSCI integrated Oil and Gas plus 52%. MSCI World IT -31%.
2023- reasons to be cheerful.
Energy prices have fallen sharply.
Global supply chains are unclogging.
A recession would not be a shock.
The excesses of 14 years of free money- now over.
End
For more details, or to contact Sean Kelleher CEO, Mondial Dubai LLC,
please contact us at
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