We all know how difficult the investment climate has been for the past decade. What’s worse: the outlook going forward is increasingly tricky, and human nature causes us to extrapolate recent trends out into the future and expect for a similar outcome. After disastrous portfolio performance resulting from the 2000-02 TMT bear market or the 2008-09 Great Recession it seems investors would be happy to achieve steady returns north of 5%, an unimaginably boring bogey in the prior two decades.
In addition to being boring, this target return would be seen as “un-ambitious” before, but now seems difficult to achieve, especially in a world of near-zero interest rates and in a world with enormous financial and economic uncertainties. Evaluating global stock markets is tricky if we are on the verge of a “double dip” in the developed economies. There is talk of too-hot speculative activity in the BRICs. Investing in government bonds feels like skating on thine ice due to an ever increasing supply from the money printing central banks. Gold is breaking new all time highs. Like Mr. Pellegrini (formerly of Paulson & Co) said recently: “It is a time of risk management rather than real decisive positioning”.
We propose that the best defense for this environment is offense. Having a plan, a systematic strategy for how to rebalance assets and look for opportunities across the spectrum of financial assets and across the globe strikes us as the real best defense. Focusing on risk management without an approach like ours at Covert Analytics, is a bit like driving with the parking brake on. As former portfolio managers we know what can occur without a systematic strategy, something we like to call “Asset Allocation Paralysis”. We coined this term to describe what happens when a portfolio manager is unconvinced whether a market is overbought or a good opportunity, whether to sell a legacy position or maintain it, whether to increase Equities or not. The uncertainty of making aggressive portfolio bets ends up causing inactivity, and the end result is a portfolio sailing through treacherous waters like a ship without a sail.