Inflation continues to be the major talking point amongst investors with the central debate focusing on whether the pickup in prices is temporary or part of a longer-term trend. Despite the increase in prices globally, markets continue to be relatively sanguine and confident that inflation will prove to be transitory; the S&P is trading at close to all-time highs whilst real yields are as low as they have been since 1980. There has also been a retracement in nominal yields with the US 10-Year Treasury back to a yield 1.44% at the time of writing, falling below the 1.5% threshold for the first time since early March.
Dario Perkins, Managing Director, Global Macro at TS Lombard highlights that ‘much of these price pressures look temporary, the result of COVID distortions, reopening costs and “bullwhip effects” in supply chains. Furthermore, Central Banks continue to play down the inflation threat, and are sticking to their dovish policy guidance.’
Tideway continue to believe portfolios are relatively well positioned for either outcome running relatively low duration in the Fixed Income book, a healthy allocation to Real Assets (historically good inflation protection properties) and a globally diversified Equity book with a mix of investment styles, some of which will benefit should the market start to believe that inflation is here to stay and yields start to creep back higher.
We are still happy with the overall composition of our Equity book with Value, Growth and Quality strategies all well represented. TS Lombard feel that Value currently retains its appeal over Growth even though some of this advantage has been eroded with Growth having more de-rating risk for not much more EPS growth. From a cycle-based perspective they argue that Quality might be the most appealing of the major investment styles. Although we stay in touch with latest trends, we do not feel comfortable in being able to time the market consistently and to take any bigger bets than we feel is necessary as part of a long-term investment plan.
We have made tweaks to the portfolio in recent months, both explicitly with the sale of Lindsell Train Global Equity and implicitly having made tactical decisions by not rebalancing and maintaining our increased exposure to our value managers who have performed exceptionally well since November. We reiterate our approach of maintaining a diversified global portfolio, by asset class, style and geographically and put trust in our managers, who we believe are among the most talented the industry has to offer, to make long term returns above their respective target benchmarks.
Our portfolios continue to enjoy strong relative performance versus benchmarks with our alternatives and fixed income exposures driving incremental returns in recent weeks. After previously identifying the opportunity in real assets; both looking cheap compared to wider global equity markets, and as a good inflation hedge should prices increases prove to be more than transitory, it is nice to see strong short-term performance in this area.
Schroder Global Cities, in particular, has enjoyed a good run. We caught up with the Portfolio manager, Tom Walker, in May and as always had some interesting discussions. Below are some of the key points to have come out of the meeting:
– Since the introduction of Environmental Impact score to the Investment Process in 2019, there has been an increased philosophical focus on sustainability in the portfolio. The fund is now categorised as an Article 9 sustainable fund by European standards, with portfolio changes made during the last year reinforcing this development.
– The fund is still considerably overweight more resilient alternative sub sectors including Data Centres, Lab Space and Self-Storage which do not face the longer-term headwinds of the more traditional Real Estate sectors.
– Protected Capital better during downturn in 2020 whilst lagging slightly in the cyclical recovery from November; manager warned to expect some underperformance versus peers as rotation into value names continues (has not been the case thus far).
– Reiterated the lack of correlation with rising yields, especially true for Real Estate in prime locations with pricing power, strong inflation hedge.
– Inflows into the strategy in 2021 extremely strong with investors worried about inflation and as direct property funds such as M&G reverse their self-enforced gating’s – Strong confirmation that our money continues to be in the right place.
