As the war in Ukraine shows no sign of ending, conditions for investors across the world remain challenging; inflation is rising, supply chains continue to be stretched and consumer confidence is low. Against this backdrop which has existed since the start of the year, both equity (shares) and bond (fixed income) markets have fallen; equities have fallen because of worsening outlook for consumers and the prospect of a recession and bonds have fallen because rising interest rates (to combat inflation) reduce the value of the fixed returns that bonds provide.
The impact of these headwinds has been felt within the Clearwater Investment Portfolios constructed by EBI but also by every other fund manager across the globe. No manager of highly diversified portfolios is immune from market corrections and the following charts provide confirmation of this.
The first chart shows how our Vantage Earth 60 has performed since the start of the year, when compared with the following benchmarks:
UT Mixed Investment 0%-35%
UT Mixed Investment 20%-60%
UT Mixed Investment 40%-85%
As a reminder, Vantage Earth 60 has 60% exposure to global equities and 40% exposure to global bonds, it is the most popular portfolio with clients of Clearwater, as it provides an opportunity for real growth with manageable downside risk.
The numbers next to each of the benchmarks represents the percentage exposure to equities of the funds contained within the benchmark. So, UT Mixed Investment 20%-60% represents all funds in the UK that have exposure to equities of between 20% and 60% - The very lowest would have 20% equity exposure and the very highest 60%, whereas Vantage Earth 60 has exactly 60% exposure to equities.
In a rising market we would expect Vantage Earth 60 to outperform the 20%-60% benchmark because it has higher equity exposure than many of the funds contained within the benchmark. Similarly, we would expect Vantage Earth 60 to underperform the 40%-60% benchmark because many of the funds represented will have higher equity exposure. We would, of course, expect the reverse to be true in a falling market, as the funds with the highest equity content will usually fall furthest.
Let’s take a look at a chart showing how things have gone since the beginning of 2022:
I would say, this is pretty much what we would expect to see, given market conditions that have prevailed since January.
I have included the above chart so that our clients might take comfort from the fact that, although their investments have been falling, as happens from time to time, they are not alone.
This might lead you to question, ‘If I am only matching the benchmarks, where are Clearwater and EBI adding value in the investment process?’ Over the short-term this is not always obvious but if we extend the time period covered by the chart, things do look a little different.
This next chart replicates the first but over the last 5 years:
In the above chart EBI Earth 60 has clearly outperformed the comparable benchmarks.
What about the outlook?
The following is taken from some commentary I received this morning from 7IM Investment Management:
“There is a saying in finance – ‘markets can only look around one corner at a time’. Headlines tend to jump from one narrative to the next. Suffice to say, investing on this basis is not a great strategy. Worrying about the next corner often results in poor decision making – usually demonstrated by selling after the fear has already been priced in. Instead, we try to build portfolios for the longer term, looking around 3 or 4 corners.
When we look around the first corner, there are some near-term concerns. Goods producers thought we’d be at home for longer than we were, and as a result, have made too much stuff – there is almost certainly a manufacturing slowdown coming. The surge in rates is taking the steam out of the housing boom. And higher inflation is eating into strong wage gains.
But looking beyond this first corner, it looks to us that any growth slowdown is likely to be short-lived. The manufacturing slowdown is just a reversion to normal production – we overspent on goods while locked down, and now we’ll underspend for a bit. The imbalance between housing supply and demand means that the rates impact will be short-lived – people need to live somewhere! And those pent-up savings are still there, ready to supplement spending where required.
Putting it together, we believe any near-term growth slowdown will be moderate, short-lived, and eventually give way to stronger growth.”
I thought it was good to end on a note of optimism!
As always, if you have any concerns about your own financial arrangements and whether you are truly making the most of your money, please do not hesitate to call me.
With kind regards,
Yours sincerely
Graham Ponting CFP Chartered MCSI
Managing Partner
