The investment landscape is increasing in complexity
The subject of growing complexity in the investment landscape has been a frequent topic in our monthly Investment Committee discussions. We have been adapting our investment strategy accordingly over the past several months, preparing for not necessarily higher market volatility but greater performance dispersion across regions and across and within asset classes.
While we see geopolitical risks rising, greater risks around growth and inflation forecasts, continued mispricing of inflation, growth headwinds picking up across all regions, and growing risk of policy error, we keep to our “risk-on” portfolio positioning. Despite this increased complexity, there are several critical, fundamentally important supporting variables for our “risk-on” positioning.
Indeed, the economies and financial markets are complex adaptive systems (CAS) — forecasting them can be highly challenging. We have witnessed systemic forecasting errors over the past several decades, as institutions have repeatedly been either too optimistic or too pessimistic on key economic factors such as growth and inflation. Challenging forecasting environments and systemic forecasting errors across public and private institutions are “par for the course” for CAS and expected as we look forward to 2022 and beyond. Given these challenges, we have decided to stick with a reductionist approach to CAS challenges in building our investment thesis.
By reducing complexity down to the most significant variables, we keep to our constructive market outlook. These three key variables are liquidity, economic growth, and real rates (see chart below). Negative real interest rates call for a “risk-on” mode in our portfolios, hence the overweight in equities.
Source: Geneva Management Group, Bloomberg data as at 01/11/2021. The products or services mentioned are provided as general information only and are not intended to provide investment advice or constitute a direct solicitation on the provisions of investments services. Past performance does not necessarily predict or guarantee future results.All three of these variables suggest a strong risk-on positioning: cash and fixed income at underweight, overweight to high-quality yield, and inflation-linked bonds within fixed income.
Overweight equities, primarily US, EU, and Switzerland, favoring cyclical sectors, value, and quality style factors. In hedge funds, we prefer allocation to credit and equity long/short, event-driven, and global macro strategies. We continue to favor distribution to solid and active managers and allocation to structural trends. Lastly, we hold a strong overweight in our gold allocation given our concerns about the geopolitical and inflation outlook and remain positive on the USD outlook.
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