| Areté Quarterly Q321 |
Business update
For starters, the All-Terrain allocation strategy is up and running! Even better, every client switched over to the new strategy which is an encouraging endorsement of the approach.
I think the timing for this is good. The balanced fund benchmark, VBIAX, had a good July and August, but a very weak September. As I mentioned in both the market review for the quarter and in Observations from 10/15, the investment landscape is becoming more complex. As the threat of inflation increases, the threat of a very different investment regime also increases. Further, that different regime is also quite likely to be hostile to traditional balanced portfolios.
For example, my current forecast for expected returns from stocks is about -6% per year for the next twelve years. This is based on methodology developed by John Hussman and is essentially a price/sales ratio for the broad market. As he has demonstrated, this measure has been extremely effective in forecasting future returns.
This is the analytical foundation for my extreme trepidation towards having a large exposure to stocks. If correct, it means stocks will be worth a little less than one-half what they are today in twelve years. That would be devastating to retirement portfolios and is exactly what I am trying to avoid.
That said, I recognize the Fed and other major central banks seem to be on a mission to inflate asset values for as long as they can. However, that effort is going to be offset by tapering in the short-term and by the need to manage inflationary pressures in the longer-term. In other words, I view it as extremely unlikely that the Fed can perpetuate the illusion it can keep stocks afloat forever.
Two big implications arise from this. One is diversification is going to be more important than ever. And by diversification, I don’t just mean small caps vs. large caps vs. international stocks. I mean securities that go up when the S&P 500 goes down. There are fewer and fewer of them but it will be critical to have them.
Another big implication is stocks and bonds are likely to endure some real turmoil. As a result, I do expect opportunities to increase exposure to stocks on a tactical basis.
Most of what is happening from a market standpoint is a transition from stocks benefiting from short-term cues to stocks benefiting from longer-term cues. As a result, the challenge of portfolio management is mainly one of daring to be different.
Superficially, taking a different tack isn’t that hard to do in itself, but it does take some fortitude and it absolutely depends on the patience and trust of client investors. Because of this, I always try to be clear and transparent in what I am doing and thinking – in order to earn that trust.
If you ever have questions or comments along the way, please always feel free to reach out – that’s what I am here for.
As always, thanks for your support!
David Robertson, CFA
CEO, Portfolio Manager
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