Investment Committee – May 2022
Look for value and dividend, stay low on duration, reduce gold
COVID and the Ukraine/Russia conflict are being accused of the recent spike in global inflation. This debate cannot exclude equal blame for the previous years’ excessive money printing and debt creation. Inflation distorts asset prices and given the excessive amount of paper-wealth as opposed to real wealth, rotation from one to the other (for example, from technology stocks to commodities) has this year become a game of musical chairs.
The Committee believes that inflation is not something that our investors should take a bet on. It is not something to gamble on whether it is transitory or not. The important thing to take away is that potentially rising interest rates, plus elevated inflation, will probably have market volatility find a new equilibrium higher. We are not suggesting massive volatility spikes, although we will occasionally see such incidents as we did in April. During this higher volatility environment, the absolute level of prices will obviously be important to our strategy, but what would be more interesting is which assets or individual securities may appear cheap or expensive. Information about flows and positioning is critical when thinking about such relative-value assessments.
KM Cube maintains its preference for high-dividend value stocks (as opposed to growth stocks) plus a conservative approach to bonds (keep the low duration of fixed-income investments).
Gold
The committee is more skeptical about gold. In today’s environment of high inflation, geopolitical conflict, and negative real interest rates, we would expect much higher levels for Gold. In contrast, Gold struggles to keep momentum. Taking partial profits may be a good idea.
Capital guaranteed is back
Higher funding rates for the $ offer opportunities for capital-guaranteed structured products. We haven’t had such an opportunity for more than ten years. A capital guarantee product allows the investor to use the funding rate (i.e. interest rate) to finance a derivative of any short. In the current environment, we are looking for companies with the potential to over perform.
In our website’s interactive tools we have deployed a new tool that scans automatically for such opportunities maximizing the potential of return while at the same time having the original capital fully guaranteed.
New perspectives
This month the investment committee had the honor and pleasure to welcome Mr. Gabriel Anastassiades Partner & Director of the Ayaltis group. Ayaltis places great importance on relative-value market-neutral investments, and we discussed extensively plans on how our clients’ portfolios may respond to any potential downside. We find that during this ever-changing market environment investors are too focused on products for the upside, and not so much on what happens if we see prices lower. Ayaltis offers a series of fund-of-funds that historically show minimal participation in downside moves and little, if any, correlation to mainstream assets such as stocks and bonds. Ayaltis offerings are a compelling alternative for all-weather portfolios.