Economic Outlook: The game has changed

01 Feb 2023 Expert insight

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Charities, like all investors, are contending with a new investment regime. We believe it to be a more hostile one characterised by higher and more volatile inflation. Traditional balanced portfolios suffered in 2022, as bonds and equities repriced on the basis of higher interest rates. Put simply, there were very few places to hide, and diversified strategies turned out to be not so diversified after all.

Conventional strategies – holding the right assets and being patient – will no longer suffice. Investors will need to be more active, willing to challenge market certainties, be able to dial risk up or down at short notice, and look to unconventional assets to provide genuine downside protection in more frequent market dislocations.

Traditionally, there has been an asset class that charities can point to that either preserved – or grew – their capital during a difficult year. Yet, in 2022 even the best asset class has been a lacklustre performer.

Equities, sovereign bonds, corporate bonds, infrastructure, property, private equity, private credit, venture capital and cryptocurrencies all posted negative returns. There has been nowhere to hide – and that is before adjusting for the double-digit inflation ravaging your capital. We have called this the illusion of diversification.

A new era

We expect the coming decade to have similarities to the 1970s – a period of political, economic and inflationary turmoil – with all the market volatility investors rightly dread.

The return of inflation has been painful for investors, and for charities contending with ever-rising liabilities. The hope is that we have reached peak inflation, and that it may now be on the way down. Sadly, however, that doesn’t mean the investment landscape is getting any easier.

So, the challenge for investors is to shift from a purely strategic approach (get the asset allocation right, and be patient) to a more tactical one. This will help deliver positive returns throughout variable market conditions. We see three key elements to this approach; the ability to hold cash (even when it feels uncomfortable), a willingness to pay to hedge against market dislocations, and the capacity to dial up risk at short notice.

This reflects a more complex and unforgiving investment landscape – a change of the game, from checkers to chess.

Ajay Johal is an investment manager at Ruffer  

 

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