The year so far
Looking back on a fairly tumultuous year, so far, in light of DAA decisions.
I’ve kept the below high level, and largely confined it to the passive vehicles that give us exposure to the underlying asset, or sub-asset class, rather than the active managers, although in the Alternatives section it is all active managers, as there are no low-cost-ease-of-implementation passive vehicles to choose from.
Since we’ve only made a handful of trades in the Alts section, it is pretty easy to follow along regardless. Sage, likely our best single Alts decision, entered the fund last year, and we’ve not changed the allocation since.
We added to European equities shortly after the UKR-RUS war began (buying in March). This trade has made a small gain, been quite volatile, and whilst it hasn’t felt “entirely worth it”, has still been generally okay.
Europe remains in a deep quagmire, where things look like they are getting worse, rather than better, as gas price grind higher, and the war drags on; equally, that’s why you are buying the region in the vicinity of low double digit PE’s.
Towards the back end of March, we added to the Emerging markets. Like the European trade, it was made after significant distress in the region, with China’s Golden Dragon index collapsing by some 24%, due to regulatory intervention, and the property sector collapse was well underway.
In particular, our addition came on the back of the state council announcement to support dual listings, and to help prevent an disorderly unwind of property related losses. That trade hasn’t really worked, but at least was made very close to the current bottom.
We added to Japanese equities after the yen’s collapse. Japan’s commitment to pinned yields (YCC) meant the currency gave way (rates and FX are two sides of the same coin), which attracted us, given our bearish view on the AUD, and preference for the yen as a safe haven currency, however we went arguably too early, as the yen really gave way shortly after. The JCB, having only just engineered the first meaningful signs of inflation in 30 years was not going to slam on the brakes quite so soon, leaving the rate differential meaningfully in favour of other currencies.
More recently, that trade has moved into the green, but it is fairly marginal.
We bought international equities generally, in May, after the S&P500 joined the global sell off. Until the S&P joined the decline, it was a more region centric fall, and not a big helpful signal of “yep, this is everyone, everywhere, in a globally synchronised risk-off mode”, which is what you want to see what making broad based asset class level DAA macro market timing decisions.
Still, none of these trades have shot the lights out, but we were underweight international equities, relative to our SAA weight, prior, and used the dislocations to move equal weight, where we currently sit.
At the portfolio level, we are still underweight equities in total, given our UW to Australian shares, which we’ll talk about next.
Most recently, we’ve trimmed some of our Australian share exposures, extending our UW to 400-500bps, which is on it’s way to become moderate. Tilts of 200-300bps either side are really neither here nor there, indistinguishable from neutral. But 4-5 percentage points is on the way to meaningful.
In the past few months, the likelihood that we are in, or set to eventually be, a global recession has grown. That’s because the Fed, and other central banks, have followed through on guided rate hikes (so the expected outcome becomes the actual outcome) and inflation has remained more persistent, and quite broad based, relative to prior expectations. Whilst we remain in camp transitory, things have gotten much more finely balanced.
The yield curve has inverted, oil is still expensive, and consumer sentiment has collapsed. The AUD is a risk on currency, and the Australian equity market is deeply linked to China, and so with a regional equity market (the ASX) that has been outperforming relative to other markets, we are happy to lighten the load.
Ultimately, we think the market got the Fed somewhat wrong, with the recent rally in risk, growth, and commodities, and don’t think that the Fed, or other CB’s, are set to pause.
In Fixed income, we were quite underweight when bond yields were at 50bps. We correctly saw the likelihood of much higher yields, however, we started to narrow our UW at ~2% on the ABG 10s. That was too soon.
We moved neutral by late 2s and OW by the time we entered the 3s, and were buying all the way up to 4s% (recall that yields move inversely to the bond portfolio, so yields up bond value down).
Given we were coming from an UW position, the portfolio did okay relative to benchmark, despite going too soon. Yields have recently fallen back quite a bit from those highs of 4.4-4.5%, and we’ve started to unwind some of the purchases. Given bond volatility, you can expect a reasonable amount of trading at the margin, from us, as long as that volatility exists.
Shown here are some of our Alts managers (not shown are managers with tickers that come out of a different system, e.g. our global macro strategies).
The two main things to note here: one the exit of Aspect. Trend following, CTA’s, and value strategies performed fantastically well, and we progressively lightened our exposure to fund the purchases outlined (in part, much of it came from cash) above.
Two, the excellent performance of Sage capital, which is a good old fashioned bottom up stock picking equity market neutral strategy.
With Alts, for the most part, there is no DAA top down macro market driver. The returns are uncorrelated, so selling them after outperformance, or buying them because some global event has occurred, doesn’t really work.
It’s only if we feel the relative prices (returns) of other strategies have changed, and are thus higher (lower) than the managers stated range of likely returns.
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