As I mentioned last quarter I thought the timing for starting up the All-Terrain Allocation strategy was good and I continue to believe that. While the benchmark VBIAX fund had a very strong October and a fairly strong December, its weaknesses were laid bare late in 2021 and early this year. With both stocks and bonds getting hit as long-term bonds rose, it is clear to me that the notion of a 60/40 index as being “safe” is going to get sorely tested.
On a similar note, I believe the prospects for Areté are as strong as they have been in quite some time. As I have mentioned many times in the past, market opportunities that Areté are well suited to exploit correlate closely with business opportunities. Further, an environment in which investing is more difficult places higher value on the experience and expertise Areté brings to the table.
When the market goes down, or gets volatile, or surprises investors in other unpleasant ways, people want answers and explanations, not just statements with red ink and a busy signal from a customer “support” desk.
In addition, since the financial crisis in 2008/9, common trends in the market have been extraordinary monetary policy, the proliferation of passive investing, modest inflation, and a strong upward trend in both stocks and bonds.
In such a benign environment, the most successful actions have been to ignore risk and take on maximum exposure to financial assets. Many investors have done exactly this. There has never been a better time to completely ignore investment fundamentals.
Until now anyway. The big honking problem with completely ignoring fundamentals is that it relies entirely on the intent, and ability, of others to keep asset prices artificially afloat. By definition, that cannot last forever.
Now, with inflation emerging, the game is changing. Approaches that have worked so well in low inflation are going to confront headwinds of similar magnitude with higher inflation. Just as huge infusions of liquidity propelled asset prices on the way up, reductions in liquidity will cause asset prices to falter.
It will take time for investors to realize this. There will be ups and downs along the way. What will become increasingly clear, however, is that many investor portfolios will not only not be gaining any more, they will be falling further and further behind.
In addition, the advisor community will have a hard time migrating clients quickly enough. Most investors are uncomfortable with change and that discomfort poses a business risk. Advisors can choose between recommending big portfolio changes to adapt to inflation (but losing clients in the process), and changing the portfolio slowly, (but underperforming and eventually losing clients in the process).
These are going to be tough times for investors and I suspect there will be a long process of digesting this reality. Many people will be ticked off and many will refuse to change. For those who are curious and recognize the need to adapt, however, Areté will be there to help.
David Robertson, CFA
CEO and founder, Areté Asset Management