As a company we’re not afraid to go against the consensus view. That’s not to say we’re contrarians for the sake of it, but we’re very mindful that the herd mentality bias can impact all investors, both retail and professional.
Because of this position, we’re comfortable making decisive, but measured moves in the way we position our client portfolios. This isn’t about taking the maximum amount of risk in the hope of achieving an outsized return, but rather looking at where the risks may come from and looking for (sometimes less obvious) ways to protect our clients funds.
Some of these risks are more obvious than others, and the interpretation of them is often quite different across the industry.
A highlighted example of this was the market during early 2020.
During the outbreak of the Covid-19 pandemic in early 2020, stock markets across the globe were incredibly volatile. We saw some of the biggest short term falls the stock market has ever seen, and there was widespread concern over what the future held.
There was panic, even among some professional investment managers.
In contrast, at Rosecut we remained bullish on markets from late-March 2020. We expected the prospect of low interest rates and government stimulus to boost markets.
We could see that there were likely to be major economic impacts as a result of the pandemic, but it’s important to keep in mind that the economy and the stock market aren’t the same thing.
This view turned out to be correct, with the global stock market experiencing a huge rally through the back end of 2020 which sustained all the way to the beginning of 2022. Not all markets performed equally, with the FTSE trailing in 2020, for example, but overall it was a very strong period for global equities.
So a very strong couple of years, but as we know markets can’t simply go up in a straight line forever. A correction was going to happen at some point, and at the beginning of 2022 we were concerned about the impact of rising interest rates.
With inflation at record levels all across the world, rising rates were inevitable. Since the dramatic cutting of rates in 2008, there have only been some tentative moves to bring them back up.
It has been a serious question as to how central banks were going to be able to bring back rates up to long term levels, without severely impacting the markets. 2018 was the first attempt to slowly raise rates, and it caused both the stock market and the bond markets to sell off at periods throughout the year.
With the prospect of rates increasing much more than they did in 2018, we were bearish on the outlook for both stocks and bonds.
This is an unusual situation.
The typical plan for an investment manager during periods of expected volatility in the stock markets is to shift a greater percentage of the portfolio into bonds. But as interest rates go up, it causes bond prices to fall, making them far from the safe haven we’ve come to expect.
In fact, with the speed at which rates have been increasing, bonds have had one of their worst years ever. So-called ‘defensive’ portfolios have seen double digit negative returns, despite being heavily weighted towards assets which are designed to have low levels of volatility.
So it’s yet another in the age of ‘unprecedented’ events. With typical portfolio allocation strategies unlikely to provide a satisfactory outcome for our clients, we’ve implemented a number of alternative strategies throughout the year.
The overarching theme is that we have been conservative with our tactical allocation in 2022. We’ve also taken a number of specific positions in order to seek additional returns where they’re available.
With that in mind we have been holding a much higher level of cash than we typically would. In some of our portfolios it is over 30%. We’ve diversified out of the British Pound in some cases to incorporate an exposure to the US Dollar, which has been one of the few safe havens this year.
Long term, holding a large amount of cash isn’t a winning proposition. Much of the content we produce goes through exactly why that’s the case. But this is a great example of how a long term (strategic) asset allocation and a short term (tactical) asset allocation can differ.
Right now, capital preservation is incredibly valuable. Cash may not be the best place for investors over long periods of time, but using it for short term positioning can be a very good idea.
This is one of the key areas we’re able to add value to our clients. A set and forget investment strategy isn’t able to make tactical changes based on market conditions. It means riding the volatility all the way up and all the down, an approach which potentially leaves significant returns on the table.
One of the structural changes we made to the portfolios this year has been a higher allocation to energy stocks. We have seen notable under-investment into the energy supply over the past five years, which has led to increases in prices.
This existing structural issue has been exacerbated by the unusual supply dynamics created by the pandemic, as well as Russia's invasion of Ukraine.
It’s a decision that has paid off very well for our clients. The energy sector is the only major US sector that is up for the year, in comparison to the wider market which is down significantly.
In comparison to the US tech sector, which has made up the bulk of many investors' portfolios in the past decade, the gap is even wider. Even the most blue-chip tech stocks are down heavily, such as Amazon (-44.88%), Meta (-67.15%), Apple (-17.95%) and Microsoft (-27.18%).
Compare this to energy producers such as Shell (+34.50%), Chevron (+48.79%), BP (+19.11%) and Exxon Mobil (+70.79%). While none of us are too happy about the rapid increases in our home utility bills, at least investors have been able to reap some of the rewards from these sky-high prices.
An opportunity arose earlier this year in a niche alternative asset, carbon credits. Russia’s invasion of Ukraine triggered a large sell off in the ETFs which track the price of carbon credits.
According to Refinitiv, the price of European carbon credits crashed from €95/tonne down to €55/tonne in the space of just five days. That’s a drop of over 40%. Much of this movement we attributed to short term volatility from margin calls and technical stop losses, which we saw as an attractive buying opportunity.
It’s proven to be another good decision. The asset remains volatile and fluctuates daily, but at the time of writing the return on this position stands at around +20%.
The bulls aren’t on parade just yet. We remain cautious over the short term, but we’re on the lookout for signs that the cycle of interest rate increases might be slowing. This is likely to come as economic growth slows.
Low economic growth isn’t a positive sign for stocks and it’s likely that we’re still a way off seeing big returns there.
On the plus side, flat or falling interest rates will support bond prices, which should see them eventually fit back into their role as a defensive option for our portfolios. Negative correlation between stocks and bonds is important long term, as it makes managing risk within a portfolio much more straightforward.
We have a range of different tools and insights available in our free app so why not try them out for yourself and sign up today? If you wish to discuss your individual position and the options available to you, you can always book in a call with one of the team.
Please note that this is not a financial advice and it does not take into account individual circumstances. Please also contact a professional advisor prior to any decision making.
The value of an investment and the income from it can go down as well as up and investors may not get back the amount invested. This may be partly the result of exchange rate fluctuations in investments which have an exposure to foreign currencies. You should be aware that past performance is no guarantee of future performance.