REBALANCING UPDATE AND MARKET COMMENTS: August 2022
Fusion’s Investment Committee has reviewed all of our portfolios across the Active, Optima and ProActive Planet series. Since the previous rebalance, the portfolios have demonstrated moderately positive returns, outperforming their benchmarks. Outperformance is close to 1% for both the Active and Optima series across all portfolios and around 1.5% for ProActive Planet. The main source of this outperformance comes from well-diversified alternative assets, including Infrastructure, which doesn’t suffer due to inflation, and demonstrated positive numbers of more than 4% (since the previous rebalance) on average across the funds in the portfolios. Another winner of the previous period was the Biotech sector, which we introduced into the portfolios during the previous rebalance, which demonstrated an impressive 8% return compared to the 0.7% return of FTSE All-Shares.
The Investment Committee, after reviewing both the asset allocation and fund selection, have decided to keep the current positioning of the portfolios.
The current selloff is self-made by Central Banks. In this regard, it is quite different to the previous ones we have seen in the last twenty years. In a nutshell – first, a lot of money was printed, some of it was wasted, some of it was invested in paper assets and some of it was saved. This pushed up prices, which coupled with disruption cause by pandemic-related supply chain issues, then spiked energy prices, resulted in record inflation headlines across most developed countries. To combat the situation, most central banks, some implicitly but most explicitly, decided to take measures to reduce spending power, in every possible way. This involves the famous wealth effect, which propelled consumption in “go-go” years – rising the value of houses, the value of pensions and disposable income. During previous selloffs, central banks were able elevate the pain by cheapening money, whereas now central banks are essentially inflicting pain to scare the consumer into reducing their spending and increasing savings by pushing rates up.
This will continue until we see a sizable reduction in pension valuations, increased mortgage payments and a slowdown (or even reversal) in house prices. The silver lining here is that this has already started happening. A typical UK retail pension pot has fallen by 10-15% in the last 6 months, house prices are slowing to a halt, new home buyer enquiries are down sharply and real disposable income has fallen considerably – the biggest squeeze on income in a generation. To this background, we can add a build-up in inventories and intermittent post-pandemic opening which both add to the easing of supply. An open question remains whether companies can pass the increased costs to consumers fully to maintain their profitability, which is crucial to secure the temporary and reversible nature of the economic slowdown and prevent a cascading vicious circle.
Barring unexpected complications, such as wars and political unrests, we might just about manage come out the other side of this, relatively unscathed, in 6-12 months’ time. This is our base scenario, which the positioning of the portfolios reflects.