Portfolio construction

Headlines

File under “thinking out aloud”.

Detail

The fixed income part of a typical Balanced portfolio, is down, and down at the same time as equities.

Below is mix of asset and sub-asset class returns. You can see that for the most part, only the commodities and gold baskets have positive returns over 6 month and 1 year.

Everything else is red, to varying degrees.

Side note: pleasingly, for our portfolios specifically, we’ve been very underweight Growth equities, and long Value, and as such have avoided some of the severe pain in the current correction, similarly our sizeable underweight to bonds, as fixed income sold off.

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From the above, the only way that one would have avoided a drawdown, like that which we’ve seen in the typical Balanced portfolio, is through a major allocation to those two sectors, commods + gold.

And so the question is, how would that have fit amongst a broader set of risk and return objectives?

Let’s look at some graphs.

Below is the r-r experience from 2005 onwards, including to the present (so captures the current drawdowns).

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…and here it is over the past year (below).

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You needed both a pandemic and the UKR-RUS war to make this pattern happen, which are, I suppose, pretty risky gambles before the fact (e.g. betting that they would happen, and allocating in size), and that’s the part that is difficult to reconcile with one’s SAA or DAA strategies, particularly if the willingness or ability to tolerate risk is modest.

Here is the humble 60-40 portfolio, and it has done very well. The bonds performed well as a risk-off hedge into the pandemic, at which point the baton “handed off” to the stocks, and the whole thing produced quite reasonable returns.

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Moving forwards, we think that inflation settles down, that bonds enjoy better ex-ante returns due to the higher yields, and that commodity prices weaken over time as supply chains de-bottleneck, and consumption patterns returns to normal.

Important Information: This document has been prepared by Aequitas Investment Partners ABN 92 644 165 266 (“Aequitas”, “our”, “we”), a Corporate Authorised Representative (no. 1284389) of C2 Financial Services, (Australian Financial Services Licensee no. 502171), and is for distribution within Australia to wholesale clients and financial advisers only.

This document is based on information available at the time of publishing, information which we believe is correct and any opinions, conclusions or forecasts are reasonably held or made as at the time of its compilation, but no warranty is made as to its accuracy, reliability or completeness. To the extent permitted by law, neither Aequitas nor any of its affiliates accept liability to any person for loss or damage arising from the use of the information herein.

Please note that past performance is not a reliable indicator of future performance.

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