We always talk about long-term performance. Our fundamental aim is to deliver returns of between 6% and 8% over the long term. As can be seen in the chart below, we had achieved this target.

For the last 18-months the portfolios have delivered negatively, as can be shown in the chart below.

This in turn has had an impact on the 10-year performance figures.

Effectively, what we have seen is that all the returns made in 2020 have been given back so the returns are roughly where they were pre-Covid.

This year has seen the S&P 500 rise to close to the level it was on 1 January 2022, and yet the portfolios have not really moved.

To provide some background to the work we have done in recent years.

  • In 2019 and 2020 we made a fundamental shift in the portfolios. The first stage of the changes was around adding some fixed income assets (debt), and diversified assets, including property and infrastructure. The second stage focused more on the equity part to bring in more growth focused stocks.
  • COVID changed the environment and although we delivered positive returns in 2021, we did struggle with a shift where the stocks that did well in 2020 were replaced by those that did badly. The only changes we made in 2021 were to protect the Cautious Portfolio more.
  • 2022 we saw the start of the war in Ukraine. What followed was rising inflation and interest rates. The stocks that we had pivoted towards continued to do poorly. In the rebalance in 2022 we held back from making any significant changes as we wanted to get some clue as to what the future held.

During all this time we have been speaking to people, researching, and trying to consider how the markets may look going forward. We have also invested in new systems. What we know is that inflation and interest rates will peak and will come down at some point, we just don’t know when. We believe that we are moving more towards a normalised investment environment (pre-2008), where interest rates and inflation may be higher than they were post 2008.

These are some of our observations:

  1. It is likely that quality rather than pure growth stocks will do better over the longer term. The availability of cash means that those businesses needing cash to fund future growth will find it harder. So, our focus in the rebalance is to have a greater skew towards quality businesses (lower levels of debt, profitable and in many cases market leaders).
  2. The transition to a greener world and energy self sufficiency is not going away. Europe is far ahead in this and so this is likely to be an area to watch over the next decade.
  3. The last decade has been a lost decade for emerging markets and Asia, especially China. China is integral to the world. As countries de-couple from China other regions will benefit, but China will continue to develop. Also, the transition to a greener world needs commodities and that in the main comes from emerging markets. We have reduced slightly our weighting to China but continue to have a higher weighting to Asia and Emerging Markets.
  4. The UK will struggle, and although we have some exposure, this has been reduced. The impact of the budget under Liz Truss has meant that property and infrastructure funds have come under pressure, but rising rates have benefited fixed income (debt). We have reduced exposure to property and infrastructure and increased exposure to debt.

So, why haven’t the portfolios really moved? We looked at the S&P 500 and pulled out the pure growth index. These are stocks based on sales growth, ratio of earnings change to price, and momentum.

The chart below shows something interesting:

Effectively, the Balanced Portfolio and S&P 500 Pure Growth Portfolio have mapped each other. This is important to understanding where we are and why we should be optimistic for the future.

Before we consider the future, we wanted to share the chart below:

To some extent this is similar to what we are seeing now. Counter trend tallies are where the trajectory is downwards but there are periods of hope.

We pulled out some figures over the last 18-months.

  BalancedS&P 500
7th March – 5th April 202230 days+8.13%+8.66%
10th May – 7th June 202229 days+3.45%+6.04%
16th June – 16th August 202262 days+11.50%+25.12%
13th October – 14th November 202233 days+8.95%+5.31%
20th December 2022 – 3rd February 202346 days+10.16%+2.91%
23rd March – 18th April 202327 days+2.28%+6.20%
Average37 days+7.41%+9.04%

It therefore seems we are in this period.

We are basing this on US data but what happens in the US will likely filter out. The chart below shows that all the signs are pointing towards a US recession.

There are two more data points which should start to give us confidence in the future. The first shows that the low points of markets occur during the recession and the recovery before the end. The second shows the following year returns.

If the data is correct, then we could see a recession start this year which would mean markets and the portfolios recovering towards the end of this year and into next year.

We also want to share the chart below. This is the S&P 500. What this shows is that value seems to have run its course but the one area that has been consistent is quality. Now we feel we understand more about the future direction of markets, this should give us confidence that the move towards quality should benefit the portfolios going forward.

In summary, it has been a tough period, but we have been busy in the background. We could have shifted to a quality portfolio in 2022, but at that stage it was still unclear around interest rates, inflation, and recession risks. We do feel confident that the portfolios are now positioned for the future.

We may do some tweaks in 2024 but expect these to be small. As a summary the focus is:

  1. In a more normalised environment, fixed income (debt) becomes an attractive diversified asset, and so the weightings to this have increased. At the same time we have kept other diversified assets but reduced the weightings.
  2. We have removed some of the higher risk growth funds and pivoted towards quality strategies which we believe will be better for the future.
  3. We continue to favour Asia and Emerging Markets including China which have been a drag on the portfolios over the last 18-months. The reason is that China is the second largest economy in the world. Other emerging markets will benefit from moving manufacturing away from China and emerging markets is needed for the green energy transition.
  4. We have reduced the number of holdings to a more focused group.

Where does this lead us?

We want to end with two charts. The first is the equity style of the Balanced Portfolio. This shows the blend between value and growth, and this is important for the strategy going forward because it provides a more balanced approach.

The second chart is the effect of diversification and the strength of the pound. The diversified nature of the portfolio means that as it stands, the currency risk is negative. To place in context, without diversification and looking at individual holdings, the currency risk would be a significant drag on the performance.

We hope that this provides context to where we are today and what we have been doing in the background.

Note: This is written in a personal capacity and reflects the view of the author. It does not necessarily reflect the view of LWM Consultants. The post has been checked and approved to ensure that it is both accurate and not misleading. However, this is a blog, and the reader should accept that by its very nature many of the points are subjective and opinions of the author. Individuals wishing to buy any product or service as a result of this blog must seek advice or carry out their own research before making any decision, the author will not be held liable for decisions made as a result of this blog (particularly where no advice has been sought). Investors should also note that past performance is not a guide to future performance and investments can fall as well as rise.