“ Do what you will, the capital is at hazard”
- Putnam 1830
Key take-aways:
The Russian stock market accounts for 0.4% of the MSCI All World Index. The Ukraine market is immaterial. “ I wouldn’t see (the invasion) as causing a major bear market, but rather a short-term shock of a few percentage points”- Glyn Owen- Momentum Asset Managers.
US consumer prices rose to 7.5% in January- the highest inflation rate in the U.S for 40 years. Inflation remains a threat.
In hard currency terms, the consumer choice is either to avoid capital risk by staying in cash- and lose purchasing power- or- accept that investment risk means absorbing market volatility.
Men of Prudence: Oliver Harwood (Quilter Cheviot): last 3 decisions:
Moved US equity portfolio towards income bearing stocks to benefit from the interest rate environment with financials.
Added Commodity ETFs to portfolios including oil, natural gas and some crops recently gaining from the Ukraine situation.
Underweight bonds as the interest rate environment is upward.
Men of Prudence: Lorenzo La Posta (Momentum Asset Management): Over the last 3 months:
Increased exposure to Chinese government bonds, reducing US Treasuries and Emerging Market Bonds.
Increased exposure to real assets like property and infrastructure.
Increased Japanese and UK equities reducing US equities.
The opportunity: Rothchild said “ buy on the sound of cannons, sell on the sound of trumpets”, prompting Glyn Owen: “ wars always end, and economies grow longer term, and with that stock markets rise”.
Market volatility and uncertainty- back to basics
“ Do what you will, the capital is at hazard”- Putnam 1830
With the content of this month’s market review meandering from the 40 year-inflationary high in the U.S to the Russian invasion of Ukraine one consistent theme has been the flow of bad news and uncertainty. Markets hate uncertainty. In such times, a return to basics is valuable so we highlight 3 “Considerations” of importance for investors to grab. Remember we have been here before: COVID and the February 2020 crash, the Global Financial Crisis of 2008. Been there, got the T-shirt. For “survival” get back to basics.
Consideration 1: Justice Putnam and the Prudent Man Rule.
Justice Samuel Putnam in his 1830 ruling targeted Trustees. Trustees have a higher exposure to fiduciary risks. As we are all trustees for our own money, there are two angles of Putnam’s observations which we might observe in times of crisis: firstly, to “observe how men of prudence, discretion and intelligence manage their own affairs, not in regard to speculation, but in regard to the permanent disposition of their funds, considering the probable income as well as the probable capital to be invested”.
Secondly, as Putnam advises “do what you will, the capital is at hazard”. Risk is fundamental to investment. Inexperienced investors will often rely on the bank to hold cash and keep their capital protected. Whilst we trust most of the banking system to do exactly that, it means that in many hard currencies protecting capital means ensuring a loss of purchasing power. Whilst the 2021 January USD inflation rate was at 3% and bearable, the January 2022 rate at 7.5% and rising is less bearable and for those already in retirement- expensive. For improving purchasing power then, we must take risk. With a “guarantee” worth only the paper its written on- it means that capital is always at hazard. Thus, Putnam was the harbinger of risk warning on all reputable investments amounting to variations on “your investment can go down as well as up- and all your capital maybe lost”. In short, to improve purchasing power- risk and volatility is normal. It is not abnormal.
Consideration 2: What are Prudent Men doing?
If “Consideration 1” takes the investor into taking risk to grow purchasing power, then Consideration 2 takes us to following the Men of Prudence. For Mondial, this is not the whim of inexperienced and unqualified financial advisers or authors. It would be the research departments supporting multi-asset managers. They after all, have the study of current uncertainty and future events as their day job. Hence, at Mondial, our go-to for current decision making is our “Herd” of multi-managers. To reflect on current decisions in times of massive uncertainty we approached two of them for their latest decisions- these are the responses:
Quilter Cheviot (Oliver Harwood)-: the last 3 decisions implemented across portfolios:
Instilling a more balanced exposure to North American equity exposure reducing Growth allocation. We had become concerned about the high allocation to growth stocks in North American equites which had done so well and provided stellar returns for investors. We reduced this exposure and added to value via an allocation to the BNY Mellon US Equity Income Fund to increase exposure to a segment of the market (financials) that would benefit in a rising interest rate environment.
We added a Commodities ETF into the portfolios to increase exposure to Oil, natural gas, industrial metals, and a number of crops, all of which have seen a significant increase in demand. This allocation has further benefitted recently as a result of geo-political risks in the market, more specifically the Russia/ Ukraine tensions with the Oil price edging closer to $100.
We have been underweight fixed income as we believe that in an environment of above trend global growth and higher inflation equities typically outperform bonds. Furthermore, we believer corporate earnings expectations should trend higher over the course of 2022 in level terms, even as the growth rate slows.
Momentum Asset Management (Lorenzo La Posta): over the last three months they have:
Increased allocation to Chinese government bonds, reducing US Treasuries and Emerging Market Debt. Chinese bonds offer an attractive combination of high income, good diversification benefits (low correlation with global equity and bond markets) and solid defensive characteristics.
Increased allocation to real assets, like property and infrastructure, as those are typically a reliable source of income and offer a higher degree of inflation protection.
Increased allocation to Japan and UK equities, reducing US Equities. The latter looked significantly more richly valued than the rest of the developed world, almost “priced for perfection”, making them fragile and at higher risk of disappointing markets. Also, with elevated inflation and rising rates, we expected a growth-heavy market like the US to underperform the ones with better valuation metrics.
Consideration 3: Time in the market is better than timing the market.
Consideration 3 is an old cliché touted by financial advisers, but its longevity is based on its accuracy. For doubters refer to Professor Brinson (and others) who estimated that the biggest influence on performance variability on periods over 5 years is asset allocation. This links back to Putnam and the excerpt that you follow the Prudent Man “ not in regard to speculation, but in regard to the permanent disposition of their funds”. In short, Putnam was not a fan of speculators, and for the likes of Brinson fans, the boundary for the difference between speculation and investment is around 5 years. The Brinson importance is that factors such as specific stock selection and market timing are not (in time) massive influences on why your performance differs from everybody else’s performance.
This is another reason why, at Mondial, our asset allocation advice is always led by the multi-asset research positioning. Our Prudent Man decision making under Consideration 2 demonstrates that, in fact, they are actively managing short term tactical decisions as events dictate. However, that is simply an element of logistical organisation within the more important challenge of producing portfolio performance over rolling economic cycles.
In summary, we lean on Justice Putnam’s remarks to fall back on basics in a time of obvious market stress. These basics were seemingly obvious to Putnam back in 1830. It is surely even more obvious now to experienced investors having journeyed and recovered from a GFC, a COVID induced crash and now an inflationary led challenge with a touch of geo-political tension thrown in. We finish with a flourish of cliches to endorse our “stay calm, stay invested” with multi-asset manager approach; noting the potential upside of not wasting a good crisis, as Rothchild said “ buy on the sound of cannons, sell on the sound of trumpets”, we finish with the time weathered asset manager Glyn Owen: “ wars always end and economies grow longer term, and with that stock markets rise”.
END.
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+971 56 2228 535