Now that we have reached the halfway point in the year, we thought it would be prudent to look back on what has occurred so far this year, highlight the main areas we believe markets will be focusing on for the rest of 2023 and provide an update on how the portfolios are positioned for the longer term.

What has occurred so far in 2023?

The start of this year has been very much in the same vein as previous years, with sentiment being as important as fundamentals for markets. Investors have been focusing on the short term instead of the long term, and volatility has been heightened as markets continue to react to headlines.

The pessimistic view on markets at the start of the year has relaxed as the imminent global recession has been pushed back further and economic conditions have been more positive than many expected. The energy shock recession did not materialise in Europe and the reopening in China has provided further easing for global supply chains.

Manufacturing continues to slow, but the service sector has remained strong as consumers continue to spend post the COVID lockdowns. This polarisation between different aspects of the economy has kept 1 volatility heightened as the path for future monetary policy, inflation and the global economy continues to be mixed.

Many market participants continue to focus solely on global central banks; their interest rate hiking cycles; and the future path of inflation. This is understandable as both inflation and interest rates impact the return opportunities for all assets. What is clear though is that we are closer to the end of the current interest rate hiking cycle as inflation has now peaked.

Alongside the focus on central banks, the global economy has had to contend with several other factors, including a US regional banking crisis, the on-going Ukraine war and heightened political risk between the US & China.

How are our portfolios positioned for the rest of 2023 and beyond?

The portfolios continue to be positioned as they have been following the Covid-19 pandemic. The team believe that the driving forces of both economies and markets are very similar, as are the risks and opportunities for investors.

Below we will address the major themes that we are exploiting and how we are implementing them within our portfolios:

Diversification

A key aspect to all our portfolios is the utilisation of diversification. This is not just across asset classes but also styles, geographies, and size. As volatility is heightened, concentration risk (the potential for a loss in value when an individual or group of exposures move together in an unfavourable direction) is something that cannot be ignored.

Analysing the return profile of markets recently shows a large divergence across assets geographies and styles. We expect this to continue and so will remain diversified across all our holdings. This also means continuing to be overweight and underweight to certain regions, geographies and styles compared to benchmarks, to provide investors with a broader more diverse portfolio than you would get by simply tracking a market.

We continue to have value bias exposure within our equity weighting. The market itself has been ignoring value investment, compared to their growth counterparts, and we believe the opportunity for investors in this space is as positive as it has been for some time.

Income for growth

Within our portfolios we invest in assets that generate an income to increase the total return opportunity for investors. Over the past few years, income generation through equity dividends and fixed income coupons has increased.

We continue to focus on dividends within our equity exposure as they increase following the cuts/pauses made by companies during 2020. Payout levels haven’t fully reached pre – pandemic levels yet and so there is opportunity for these to continue to rise. We also find that companies who have a strong reputation for paying dividends are higher quality and offer protection in volatile markets.

From a fixed income perspective, we continue to focus on higher yielding assets where coupon payments have increased recently as underlying central bank rates have increased. For many fixed income markets, the yields on offer are the highest they have been for a long time.

Fixed income for defence

Within our fixed income allocation, we continue to be very defensive from both a credit and duration perspective. We believe that central banks are close to the end of the interest rate hiking cycle. There will be a time soon where increasing duration should provide positive opportunities and we are actively reviewing funds in preparation for this.

Alternative beta and alpha

Alternatives continue to be an overweight position within our portfolios. The reasoning for this is that the alternative assets we invest in provide both a lower beta, and contrasting alpha to the other assets within the portfolio. This is key to provide better opportunities to outperform over time.

The three main alternative areas we are investing in are defined returns, infrastructure, and gold.

Defined return funds provide investors with a known return outcome based on underlying market performance. We continue to utilise defined returns as the return potential is extremely positive. Due to the heightened volatility in markets currently, many of the defined return holdings are providing the highest potential return outcomes with the greatest defence, which is positive for investors.

Our global infrastructure allocation provides investors with inflation protected income that is backed by long term projects run by large infrastructure managers. There is a need for infrastructure spending to increase, due to lack of spending over decades, as well as the need to move towards carbon net zero over time. This is providing huge tailwinds to an asset class that is defensive in nature and provides investors with long term income opportunities that are generally repriced in line with inflation.

Finally, we invest in gold, and gold and silver miners to provide a defensive hedge and a positive lower beta to other assets in the portfolio.

We continue to be comfortable with how the portfolios are positioned. Current market conditions are tough, but we do see light at the end of the tunnel. Many of the assets that we are investing in are long term in nature and the underlying themes should provide investors with positive alpha over time. Many valuations across asset classes are at cheaper levels than normal, meaning the potential return on offer is higher than it has been for some time. Investors who are patient and invest for the longer term will be rewarded.