Performance: Standing out from the crowd- 2022?
Performance: “Standing out" from the crowd- 2022
This month’s theme takes us to a free lunch and a raising of the glass to digesting volatility. Background dinner talk links to the continued bearish behavior of asset managers. Their negative behavior driven by uncertainty over deciphering recession in the US, and the shadow of inflation on US assets, being only two of some headlines in a world which continues to look different from the bull markets which drove investments in the decade up to the end of 2021.
Our menu today:
The Free lunch diversification.
Volatility for dessert.
Raising a glass.
1. The Free Lunch- diversification
At Mondial, we continue to extol the virtues of multi-asset managers and their tactical and strategic diversification. Diversification is your free lunch. At a time when risk (equity) markets are largely showing the red scars of a bear market (see our lead cartoon); mirrored in other liquid asset markets; the need to diversify portfolios across assets is obvious. For our inexperienced investors- we explain “obvious” as the need to balance the avoidance of falling portfolio values, with the need to retain some exposure to assets that will inevitably rise again. In current markets- this makes recommending multi-asset diversification for capital- “obvious”.
A regular go-to explanation on the benefits of multi-asset returns (diversification) is expressed in Diagram 1- “Asset Class Returns” provided by ENBD Asset Managers. The Diagram shows the best asset class performers for the different years between 2007 and 2022. At first sight, the splash of colour is dazzling. However, as each colour represents an asset class, the fact that one colour doesn’t dominate performance (either good or bad) for very long, underlines the wisdom of employing multi-asset managers who can change the weight of exposure between asset classes as they feel fit, and as opportunity moves from one asset class to another.
DIAGRAM 1- Asset Class Returns- 2007 to 2022
2. Volatility for dessert.
What can you do to enjoy risk during volatile and certain markets? Two considerations for experienced investors who feel that they can afford a longer view on current market discomfort. Firstly, the stock pickers story, and secondly the stock market story.
For the stock-pickers story, we lean on the expertise of Dipanjan Ray, Senior Portfolio Manager at ENBD Asset Managers. Ray believes that whilst the month of August has shown some good weeks in risk (equity) markets- he believes that volatility remains a likely feature of markets for the rest of the year and certainly whilst inflationary and recession fears remain high. As a stock picker, Ray will argue that the downside deviation parts of volatility actually provide opportunity within his fund (ENBD World Opportunities Fund- EWO) which focuses on high-quality, growth-focused sector leaders. The point Ray will argue is that indices might be “in the red”, but good quality is good quality and good companies at a cheaper price make sense to buy. Ray argues that his investment process is what provides the potential for better-than-market performance “In EWO, through bottom-up fundamental analysis and proprietary screening, we select around 70 companies across a diverse set of industries (both cyclical and structural) from a universe of c.7000 names. This implies a 1% selection rate”. Ray will argue that performance can be found in picking stocks from the market rather than the stock market itself.
For the stock market story, we refer you to our article in this month's Newsletter “And when they were down, they were down…” CLICK HERE as we reference the nursery rhyme about the Grand Old Duke of York and the opportunity to exploit volatility by way of regular investing. Again, the article is a repetition of points made in earlier months although we add the point that there should be room for such an approach for all levels of investor- from sophisticated-to-experienced- to- inexperienced investors based purely on the expectation that regular premiums/savings is only likely to be conducted by investors with a good economic cycle as a time horizon. Within that cycle, it is quite reasonable to expect the “reversion to mean” of a recovering S&P 500.
DIAGRAM 2- And when they were down, they were down…”
3. Raising a glass
Despite the negativity of our background themes this month, there remains pockets of opportunity within the investment world. At Mondial we have ventured into the world of alternatives from time-to-time. One of the stand-out performers over the last 5 years or so has been wine portfolios. Admittedly, our early ventures were as much driven by fun as part of a portfolio plan, but the underlying performance continues to drive interest. In this month’s article “ Fine wine investment a safe haven during economic downturn- we’ll raise a glass to that!” CLICK HERE the authors at Cru Wine have provided Diagram 3 which demonstrates the out performance of the Liv-ex fine wine index which the Cru portfolios are benchmarked against.
There are two risk considerations with wine portfolios. Firstly, at Mondial we would never be advising a large percentage holding of overall assets. The risk of the odd bottle of vinegar appearing in a portfolio exists to a small extent, the bigger issue is that the market size is small compared to the world of major investment market indices therefore the wine play should be taken as a high-risk play. The Mondial view would be at less than 10% of a portfolio for even the most aggressive investor. Secondly, the practical risk is that your portfolio ends up as something which you consume. On this I am reminded of my wife’s advice to buy her some gold earrings “as an investment”. The best of the reds is as unlikely to monetize as my wife’s earrings. Let’s call it consumption risk.
DIAGRAM 3- Fine wine versus major asset classes
For more details, or to contact Sean Kelleher CEO, Mondial Dubai LLC,
please contact us at
+971 56 2228 535