Asset allocation in 2022

A good summary of where to put the money in 2022.


We agree. It’s tough out there.

Still, let’s tackle each one.

The S&P 500 is, to our mind, a better bet than the tech heavy NASDAQ, where earnings expectations are simply too aggressive (e.g. everything in the ARKK portfolio). UW CCMP, OW SPX, as the relative trade there.

Note the below graph, which is the Goldman’s “unprofitable earners” basket, which quadrupled since the onset of the pandemic, and is now in the process of giving much of that back.


Further, whilst we are underweight US equities at the margin, it remains the case that the equity risk premia in the US is still around 4-4.5%, which makes it a meaningful contributor to the SAA objective.

Better (higher) premia are on offer elsewhere (e.g. UK and European equities) which is why we have modest DAA tilts towards markets ex-US, and are very high in the EM region (where we have a small exposure), as we mention at the end of the note.

Gold continues to sell-off on risk, for the most part, and hasn’t proved a meaningful inflation hedge, given that prices are more or less unchanged, despite the highest level of inflation we’ve seen since in 40 years. As such, we remain happily underweight both the commodities, and the producers.

TLT (fixed income) at negative real yields is indeed much less attractive than TLT yielding 3%. But as long as they remain negatively correlated with equities (which is what the graph below highlights)…

…there is a clear improvement in the overall portfolio Sharpe ratio by combining stocks with bonds, even if you assume next to zero return, and impose an absurdly high level of vol. It is the Sharpe ratio that we are trying to maximise, whilst meeting our SAA objectives.

So, to be clear, the 60/40 portfolio is still very much alive, and in a similar manner to our comments on DAA positioning for equities, we are underweight fixed income, but still have a meaningful chunk as part of the overall portfolio

Emerging markets haven’t worked as a trade in about a decade. China is looking very wobbly, Indian equities (Nifty) look very overvalued, and being overweight EM equities into a stronger USD, tighter monetary policy environment whilst COVID continues to disproportionately effect the region (due to less well developed medical capabilities and vaccine access/supply) strikes us as an unnecessarily risky trade, to take a major position.

However, ex India, the region is very cheap, and, over the long run, does have good growth prospects, as such a small absolute exposure is warranted.

Bottom line, when uncertainty is this high, remain diversified, don’t have major (unrecovered) tilts either way (too bullish, or too bearish), stay liquid (which is often why we aren’t interested in allocating to private capital markets (debt or equity) funds in Alternatives, and spread the capital far and wide.

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