|Over the last three months, markets have been buffeted by inflationary concerns, rising interest rates and war In Ukraine. Subsequently our wealth management portfolios suffered losses in what was a difficult quarter for almost all asset classes, with few places to hide|
Portfolio Activity in Q1
The expectation of higher interest rates as a result of inflation, extrapolated growth fears resulting in an unforgiving sell-off in January where equities suffered across the board. Due to our investment managers preference for ‘growth’ stocks versus ‘value’ this hurt our wealth management portfolios disproportionally.We had reduced our positions in First Trust Cloud Computing investment fund and Baillie Gifford Discovery investment fund ahead of this sell off as they represented ‘Covid Winners” which were expensive following a very good period of investment performance.
We used this weakness to deploy some of the capital, adding to our existing position in LXi REIT investment fund which operates online distribution warehouses and other commercial property assets and produces a very good yield. We also added Polar Capital Global Insurance investment fund a defensive growth play in a sector which tends to benefit from higher interest rates. We opened a new position in the Atlas Global Infrastructure Fund a specialist infrastructure asset manager particularly focused on green energy transition. We also added to our existing position in our First Trust Blockchain Fund which aims to take advantage of the incredibly disruptive advances in blockchain technology.
While equity and bond markets have been unusually volatile over the last three months, our investment exposure to commodity markets including oil, metals and agriculture have been an effective balancing asset class.
For some time, we have felt it better to utilise commodities, especially industrial metals, as an offsetting asset class in the investment management portfolio, rather than bonds. Commodity valuations are driven by demand and supply, and even before the invasion of Ukraine, our investment managers felt there was likely to be greater demand for industrial metals than supply of them. The move towards renewable energy and automobiles without internal combustion engines ensures their future demand.
Undoubtedly, the invasion of Ukraine has highlighted and accentuated the benefits of our commodity allocation, and this has led us to increase and broaden the exposure, specifically to include agriculture and food-related commodities as both Russia and Ukraine are major producers.
Subsequently we have increased our investment exposure to commodities across the wealth management portfolios to circa 23%. This is very rare for a private client portfolio. We had an existing position in WisdomTree Industrial Metals investment fund which gives exposure to four of the most in-demand metals – Aluminium, Copper, Zinc and Nickel, and we added the WisdomTree Enhanced Commodity Fund which has a large amount of exposure to Oil, Gas, Corn and Wheat. This part of the investent portfolio has performed very strongly over the period and has offered some relief to the equity weakness.
The Good News…
The good news is that markets have endured so much negative news since December that much of that is now priced in.
Equities have shown some recovery since mid-March on hopes that a deal may be agreed with Ukraine, and Putin can be given the opportunity to withdraw while claiming some form of victory. This will fulfil the dual purpose of reducing inflationary pressures and giving further confidence to equity markets.
We expect this will be a catalyst to a bounce in equity markets as many stocks now look very good value. In particular, the Green Energy positions which dominate our portfolio are likely to benefit from the recent energy price shock as governments pivot to become more self-reliant, and the oil majors start to acquire green energy companies with the windfalls they are currently benefiting from.
Furthermore, in March, as expected the US (and the UK) raised their base rate for the first time since 2018 and indicated a further eight rate hikes by the end of 2023. The reaction of markets was benign (if not bullish), which suggests these rate rises were already priced in following the correction in January. Any suggestion that inflation is dissipating, or rates may not increase as aggressively as expected, will be bullish for equity markets.