We are pleased with the performance of our portfolios last year. Despite our portfolios all falling in value, we kept losses to a minimum and successfully outperformed our peer group. Markets will generate losses from time-to-time, but should still rise in value over the long-term. If we can minimise losses during weak markets, this positions our investors well to recover from a higher base. Last year our portfolios were ahead of the peer group by between 2% and 5.5%, and, despite all the portfolios losing money, we think we have positioned our clients well for the long-term.
The catalyst of so many of the changes last year was the emergence of inflation globally. After steady declines for the last 30 years it came back strongly. Luckily we were able to predict this and help protect our investors.
The causes of inflation were shortages in many commodities, in particular oil and gas, and excess personal savings from payments made during the Covid crisis. The key question for investors now is how long term inflation will be.
The markets expect inflation to recede and return to 2% but we think this is unlikely. Wage growth globally is accelerating as workers are relatively scarce. This is happening in developed economies but crucially it is even more powerful in developing countries in Asia. A long term trend of increasing wage growth will feed inflation. At the same time we think it is likely that many commodities will be in short supply this year and prices will have to rise. Commodities are the base input into manufactured goods, electricity productions and transport. Increases in price are therefore significant for inflation.
Lastly we also believe predicting inflation is not a science because human psychology is very important. How people react to changes in the economy has a big impact. In the past it has been normal for inflation to rise in waves, falling back before rising unexpectedly again. This happened in the 1940s and 1970s both of which are analogous periods to today. A major reason for this is mass psychology and we think we are likely to see something similar now.
We have protection against inflation in the portfolio in the form of inflation linked bonds, lower valued traditional shares and direct commodities investment funds.
Overall we are confident that long-term investors with us will be rewarded. We focus on controlling risk for clients and generating strong long-term returns. The investments we hold for clients should be able to deliver both. This year could be another challenging one if we are right and there is a global recession. We will be looking for opportunities to buy depressed assets if this happens.
Presented by Guy Myles. Capital at Risk.
