The second quarter was another difficult one for many investors as both stocks and bonds lost ground - again. The Vanguard fund VBIAX, a representative 60/40 fund, lost 12.1% in the period.
The headwinds for conventional balanced funds continued as the All-Terrain allocation strategy performed in line with expectations. The key was to mainly avoid stocks and bonds – both of which had become extremely expensive.
In a sense, we are in a period of managed decline by the Fed. Having gotten a good chunk of investors beholden to its “communication” strategy and subsequently “corralled” into passive products, the Fed realized a great deal more power to effect outcomes.
By guiding the direction of asset prices through interest rates and jawboning, the Fed could either dial up risk appetite – or dial it down. In doing so, it could also impose some control on economic growth and prices. But it only works if a big chunk of investors just passively follow.
Now with inflation posing a persistent concern, the Fed is deploying a “dial it down” playbook. For those investors who are “corralled” the news is bad. Their investments and retirement accounts are effectively being used as a tool to reduce inflation. Good for the Fed, bad for investors.
Not for all investors, however. Not only is it possible to avoid much of the pain, but it is also possible to find opportunities in the disarray. You have to do something different, however, and you have to be able to get enough conviction to act. That happens with rigorous research and analysis. This is exactly what Areté is built to do.
As a result, I am as optimistic about the potential for Areté as I have ever been. It has taken longer than I would have liked to get here, but investment conditions could hardly be more conducive to Areté’s value proposition.
As always, I try to provide regular updates on my thinking and I encourage anyone interested to check them out. “Observations” is a newsletter I started on Substack in early 2020 and have evolved into a weekly update of my thinking about markets and portfolio strategy. The Areté Quarterly continues to provide a more detailed analysis of the investment strategy.
Finally, I always welcome feedback, comments and questions. I know markets can be confusing and there is a lot of conflicting information and advice out there. If you want to know what I think, just ask! That’s what I’m here for.
As always, thanks for your support!
David Robertson, CFA
CEO and founder, Areté Asset Management