Partner Insight: The world is changing, is your portfolio ready?

As the investment landscape shifts, investors remain dangerously concentrated in the last decade’s winners. With inflation expectations and valuations where they are, investors must adjust their return expectations or their portfolios

clock • 5 min read
Partner Insight: The world is changing, is your portfolio ready?

Inflation is here to stay

The last decade was a fabulous time to own financial assets as events coincided to create a perfect environment of low inflation, low interest rates and ever-increasing central bank bond purchases.

This convergence translated into record-low bond yields, propelling bond prices to unprecedented heights and delivering handsome rewards to investors. Lower bond yields also lowered the returns required for equities, so valuations swelled - especially those of exciting growth businesses. Over short periods, bonds reliably counterbalanced stocks, but over the longer-term, they both went up.

However, the environment is changing, and we believe a sunset, driven by inflation, is coming. Long-term deflationary forces—waning labour power, globalisation, cheap energy, and the peace dividend—are now stopping or reversing. But what does this mean for your portfolio?

Markets are concentrated in the last decade's winners

Looking at twelve valuation metrics over the long-term, one thing is clear - broad global stockmarkets are still expensive - they've only been more expensive 16% of the time on average of those metrics. 

Meanwhile, global bond yields are not high by historical standards. Analysis by the Bank of England, going back 700 years, shows that global bond yields today are still lower than at almost any point in human history - apart from after the Second World War and in the past decade.

You may be thinking so what? But valuations matter over the long-term, for both asset classes. With equities and bonds facing a tougher environment, traditional 60/40 portfolios may have a challenging road ahead.

This would be less concerning if investors weren't so heavily concentrated in the past decade's winners. History shows that passive exposure often leads to concentrations in expensive areas just before those areas suffer. It also shows that the most overvalued assets crash the hardest when bubbles burst. This is concerning, given the current state of passive portfolios.

Global stockmarkets, and consequently passive strategies, are heavily concentrated in the US, giant companies, and technology shares. The magnificent seven - Apple, Microsoft, Alphabet, Amazon, Nvidia, Meta and Tesla - alone account for 19% of global passive portfolios. Also, two-thirds of assets in the Investment Association's (IA) 40-85% equity category are parked in passive strategies. Among active funds, around three-quarters of active funds are in growth strategies, only a quarter are in blend or value.

So many investors may not be as diversified as they think. Holding multiple active funds that invest in similar things can be painful when trends change. Since many active funds in the IA 40-85% equity category are more than 90% correlated with the largest active fund, investors may discover they're diversified in name only.

Genuine diversification is key

So, how does one prepare? Firstly, you need to understand the type of environment to expect and the right tools to navigate it. While equities thrive in booms and bonds thrive in busts, the traditional 60/40 balanced fund offers little hope of outperforming cash in a stagflation scenario.

However, there are healthy alternatives. Investments in inflation-linked bonds and commodities can provide a hedge against stagflation, while undervalued stocks may mitigate equity market declines. For asset allocators, incorporating value-oriented investments into passive and growth-heavy portfolios can enhance returns and manage risk effectively, as demonstrated by the past decade.

Time for a sunset ready portfolio

Despite the challenges, diversifying your portfolio and embracing value stocks and assets primed for success in an era of higher inflation, can yield significant investment rewards.

As contrarian, value-oriented bottom-up stockpickers, we have sought exposure to assets that could perform well in various environments, including stagflation. Within our Global Balanced Fund, our equity exposure spans dozens of stocks that we believe offer better value than overpriced world markets, providing resilience in the upcoming decade. Instead of passive bond market exposure, our portfolio comprises assets capable of weathering stagflation, such as inflation-linked bonds, gold, underappreciated corporate bonds, and cash. We are happy to be different from our benchmark[1] and peers[2]; it's an approach that has served us well. Since inception, the Fund has outperformed its benchmark, and is ranked in the top five among its peers.[3]

As Venus continues to turn, we believe we are just getting started. While many investors fear sunset, we are looking forward to the new dawn.

To find out more about our analysis and how you can prepare your portfolio for a new day, click here to download and read our full white paper.

 

Disclaimer

The contents of this communication have been approved for issue in the United Kingdom by Orbis Investments (U.K.) Limited which is authorised and regulated by the Financial Conduct Authority. Orbis Investments (U.K.) Limited and Orbis Investment Management Limited are members of the Orbis group of companies ("Orbis").

This communication does not constitute an offer, solicitation or recommendation to buy, sell or hold any interests, shares or other securities in the companies mentioned in it. Orbis has not considered the suitability of this investment against your individual needs and risk tolerance. You must not rely upon this communication or any part of it as investment advice and Orbis does not assume and will not accept responsibility or liability (whether arising in contract, tort, negligence or otherwise) for any error, omission, loss or damage (whether direct, indirect, consequential or otherwise) in connection with the information in this communication and disclaims any such liability to the maximum extent permitted by law. This communication represents Orbis' view at the date stated and may provide reasoning or rationale on why we bought or sold a particular security for a fund. We may take a different/the opposite view/position from that stated. This is because our view may change as facts or circumstances change. This communication has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Entities and employees of Orbis are not subject to restrictions on dealing in relevant securities ahead of the dissemination of this review.

Past performance is not a reliable indicator of future results. When investing your capital is at risk.

 

 



[1] Benchmark - 60% MSCI World Index and 40% JP Morgan Global Government Bond Index hedged into British Pounds ("JPM GBI"), (together, "60/40 Index")

[2] Peer Group - Investment Association Mixed Investments 40-85% Shares Category

[3] Source: Morningstar as at 31 August 2023

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