31 May The Return of Return
Has anyone seen my Investment management handbooks? I threw them away a few years ago because I rendered them entirely obsolete in the ‘New Normal’ world of zero returns (specifically interest rates and the like). Portfolio theory, asset allocation, capital asset pricing models (CAPM) to mention a few traditional academic torture chambers became irrelevant, years of study vanquished. But, in the past quarter or two I am encouraged by the re-emergence of what looks like traditional return patterns among various asset classes. Such a phenomenon coincides with our assertion of the ‘New Normal’ economic landscape i.e. traditional cyclicality and associated polices e.g. positive interest rates and inflation.
Stronger economic growth is the objective but lift-off demands a higher risk premium than investors have been used to post crisis. Such a genuine change in economic posture has been unnerving and volatility, certainly during 2018, is rising. Just how much runway or rather hillside that remains is the subject of much debate but there will be an economic and associated market descent in the future where advisors will be called out of their passive slumber.
The great news is that for active advisors the breadth of asset allocation options is widening for the first time in an age. For many years I have lamented the pitiful returns available outside of equities and the challenges of creating portfolios with genuine diversification benefits. My conversations with clients are now changing. Let’s not get too carried away yet, but cash rates are now well above zero, every day I see banks advertising term deposit rates as high as 1.25-1.50% (I said don’t get carried away), that’s more than a competitive investment management fee so at the very least the most frightened investors have a place to hide that is not a net losing scenario. Yields in high grade corporate bonds ranging from 4-6 years are approaching 4%. There is likely downside in bond prices as yields creep higher but that’s a respectable return for a pretty conservative bond investor. In my opinion stocks remain the most attractive asset class. Recent valuation adjustments, particularly the downdraft in valuations for staples, REITs, utilities and telecoms, means that income investors are presented with a significantly more appetizing dividend smorgasbord than they have seen for years.
For investors the net result is that a traditional balanced portfolio now offers a much-improved risk-adjusted return for investors. Indeed, the CJL Balanced composite, an aggregate of client investment portfolios that sit within the category, have provided stellar returns.
We have recently been awarded 2 Star Top Gun Investment status by PSN* for being a top ten manager. Our 12-month balanced return is 15.98% versus a benchmark 8.9%**.
I still strongly believe a portfolio of carefully selected equities will far outperform any alternative asset class over the long-term but that is not the appropriate strategy for investors seeking lower volatility. The shift higher in traditional lower risk yields, witnessed over the past year, is a genuine upgrade for balanced portfolios marking the welcome return of return.
*The PSN US Balanced universe is comprised of 150 firms and 300 products
**60% S&P500/40% Barclays Govt Credit
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