Yesterday, the Federal Reserve in the US increased interest rates by the widely expected 0.75%, but the markets still fell sharply following comments by chairman Jerome Powell that central banks still have “some way to go” in their fight against inflation. He indicated that rates have only just reached levels in the States where they are starting to have the necessary effect on prices. This hawkish stance is not helpful to equity or bond markets, meaning there is no hiding place from the pain just now.
I was interested that in the UK equity markets rose yesterday, even though on the Today programme on Radio 4 yesterday morning, I listened to Sergei Markov, a former adviser to Vladimir Putin, all but threaten the West with full scale nuclear war. I fully expected the markets to fall off a cliff at the open but of course they didn’t, as most see these statements as the empty threats they almost certainly are, let’s hope they are right.
It is clear that the equity and bond markets are focussed firmly on inflation and the actions that central banks are taking to tackle this, with even the prospect of nuclear war having very little effect.
Against this febrile backdrop I thought an update on how the Clearwater Portfolios, managed by EBI, have been doing might be welcome.
This first chart shows how EBI Vantage Bond, EBI Vantage 60 (60% equities, 40% bonds) and EBI Vantage 100 have performed since the start of the year. In this chart we can see how the portfolios containing equities rallied during the period June to August, but that the Bond portfolio continued its downward slide, due to the continuing increases in interest rates.
This next chart focusses on the market rally from 16th June to 19th August. Here we can see that the 100% equity portfolio rose by over 14% in a period of just over 2 months, highlighting why it is so important to stay invested through periods of volatility – we never know when sentiment is likely to change, and markets tend to respond very quickly when it does.
We must then look at what has happened since 19th August. The following chart shows a renewed slide caused almost exclusively by the hawkish stance being taken by central banks to combat inflation. Interest rate rises had previously been priced in to some degree but as inflation around the globe has proved so persistent, central bankers have turned up the heat even further and consequently, markets have given back most of the progress that was made earlier in the summer.
I am conscious that I quite often provide updates on how our portfolios are performing but what I don’t often go into is, how are our portfolios performing when compared to others? The following couple of charts address this.
These are slightly different charts which look at returns on the vertical access, with volatility (risk) on the horizontal access. If you think about it, the perfect portfolio would appear in the top left corner, because this would mean the portfolio had performed spectacularly well but with very little volatility – sadly, no such portfolio or fund exists.
This first chart looks at the same portfolios above and compares them with the appropriate sector averages over the year 31st August 2021 to 31st August 2022.
If we first look at point E towards the bottom left of the chart, this represents the EBI Vantage Earth Bond portfolio, and compare this with point F, which represents the pension sector average. Here we can see that the sector average has delivered a worse return and with greater volatility, this is a good result (relatively) for the EBI portfolio. The EBI portfolio has still fallen over the course of the year, but it hasn’t fallen as far, and it has been less volatile.
The same is true for the EBI Vantage Earth 60, against its peer group and also EBI Vantage Earth 100, against the global equity sector. In each example we can see better performance from EBI with lower volatility.
The chart above just looks at the past 12 months, which I think we can all agree, has been unusual. The following chart, however, covers the 20-year period from 31st August 2002 (The EBI portfolios haven’t existed for 20 years, so these are simulated returns). Even over this much longer time period, the results are the same, except for the Bond portfolio. Over this longer period, the sector has marginally outperformed, BUT it has done so with considerably more volatility.
I hope the above charts have helped provide some reassurance that, although things are not going particularly well at the moment, on average our investment solution is faring as well (if not slightly better) than alternative offerings.
Things will improve when inflation appears to be coming under a degree of control and if/when there is some kind of resolution in Ukraine; I do hope to be able to write with more positive news soon.
I do hope the above makes sense but, as always, if you have any concerns about your own financial arrangements or would like to discuss 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 FCSI
Managing Partner
