Monthly Review – January 2024
OUR PERSPECTIVE
Whilst the US equity market continues to make new highs, other markets around the world look like they might be running out of steam. What’s more, US equities are up almost 40%, as measured by the S&P 500, since it bottomed out in October 2022. Since then, the biggest headwind in our portfolios has been our basket of trend following managed futures strategies.
This month we ask ourselves, why allocate to them at all?
The answer is quite simple: diversification.
Important to note however, not just diversification for the sake of diversification. We are big believers that unthoughtful diversification only destroys returns. What we want to diversify away is risk. Specifically, drawdown risk.
The below graphs show the four largest drawdowns of the MSCI AC World Index over the last 30 years. We also plot the returns of the SG Trend Index, a basket of the largest trend following managed futures strategies globally. The benefits are quite clear.
Add to this our ability to re-allocate capital at points when dislocation gets too extreme, and one not only diversifies away risk, but one could add significant alpha along the way. We are well aware that we will not ‘time the market’, but that is not our objective. Our objective is to deliver market beating returns in a simple way, whilst focusing on preserving purchasing power and avoid significant drawdowns.
That is in short, the beauty of trend following managed futures. Also, with the US regional banking system in a state and corporate profits set to disappoint, an allocation to trend following strategies is worth considering in our view. We discussed some of the intricacies on trend following with Richard Liddle, CEO of Bowmoor Capital, during our latest podcast. Worth a listen!
“THE IDEA THAT THE FUTURE IS UNPREDICTABLE IS UNDERMINED EVERY DAY BY THE EASE WITH WHICH THE PAST IS EXPLAINED.”
DANIEL KAHNEMAN, THINKING FAST & SLOW
To see graphs, download the PDF using the button at the top of this page.
EQUITIES
Following a strong finish to equity markets last year, US equities continued the upward trend in January, and the trend behind growth companies remain robust as the disinflation narrative continues to drive markets. Other markets seem to have caught a bit of a wobble. We remain underweight equity markets due to the risk-reward outlook, specifically US equities which we believe are overvalued with earnings season set to show cracks in the US business cycle.
FIXED INCOME
Fixed Income volatility bounced back up as fears of a US debt default rose to the fore. Core UK inflation proved to be stickier than many expected, and Gilts sold off heavily over the course of the month. We retain our views that inflation is a problem in the rear-view mirror, and that the bigger issue lies in deflationary risks alongside an over-reliance on debt. For this reason, we retain exposure primarily towards high quality nominal bonds, with a marginal exposure in short duration inflation-linked bonds as a hedge. With regards to broader credit markets, we remain underweight as we believe markets are mispricing risk, with downside potential further exacerbated by our concerns around liquidity.
REAL ASSETS
WTI continues to trade in the mid-70’s range and Brent in the low $80’s. Natural Gas continues its decline with many markets oversupplied and demand being questioned. Gold is the only commodity we are overweight, and despite giving back a little during January, remains well above the key $2000 mark and in a strong upward trend. Given half the world will vote in national elections this year, we especially like the hedge it provides against monetary devaluation and event risk.
SPECIALIST STRATEGIES
Our specialist strategies continue to play a significant stabilising role within our portfolios. Our managed futures & trend following exposures had a difficult 2023, but as per our earlier comments above, we retain significant conviction in their role in our portfolios. Specifically, we continue to have conviction in the sustainability of the competitive advantage of the strategies we own, and the alignment of interest between the managers, and us and our clients. As for private markets exposure, we retain limited exposure to these, both credit and equity, given our concerns regarding debt and the refinancing cycle.
CURRENCIES
We remain broadly neutral on currencies. On the margin we note that changes in interest rate expectations would likely support a weaker USD. The US Dollar however, remains the global reserve currency of choice, and in a severe market sell-off, we expect it to do well. We retain our positive view on the Japanese Yen, which we believe is undervalued with clear catalysts for a potential revaluation on the horizon.
CONTACT US
For further information on any of our services, or if you would like to arrange a meeting with an investment manager to see how we can work with you, please get in touch.
Disclaimer:
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Important information
Shard Capital Partners LLP is a limited liability partnership, registered in England with registration number OC360394. Shard Capital Partners LLP Registered office: Floor 3, 36-38 Cornhill, London, EC3V 3NG. Shard Capital Partners LLP is authorised and regulated by the Financial Conduct Authority in the United Kingdom, reference number 538762.
This document is provided for information purposes only and is intend for confidential and sole use by the recipient. It is not to be reproduced, copied or made available to others. The information set out in this document does not constitute investment advice or a personal recommendation. The views expressed in this document are not intended as an offer or a solicitation, to purchase or sell any security or other financial instrument, credit or lending product or to engage in any investment activity.
Past performance is not a guide to future performance. It is important that you understand that with investments, your capital is at risk. The value of investments, as well as the income derived from them, can go down as well as up and investors may get back less than the original amount invested. It is your responsibility to ensure that you make an informed decision about whether to invest with us, based on your particular objectives. If you are still unsure if investing is right for you, please seek independent advice.
The information and opinions expressed within this document are the views of (the company) and are based on information we believe to be reliable, but we do not represent that they are accurate or complete, and they should not be relied upon as such. Any information provided is given in good faith but is subject to change without notice.
No liability is accepted whatsoever by (the company) or its employees and associated companies for any direct or consequential loss arising from this document.
Disclaimer:
This document is provided for information purposes only and is intend for confidential and sole use by the recipient. It is not to be reproduced, copied or made available to others. The information set out in this document does not constitute investment advice or a personal recommendation. The views expressed in this document are not intended as an offer or a solicitation, to purchase or sell any security or other financial instrument, credit or lending product or to engage in any investment activity.
Past performance is not a guide to future performance. It is important that you understand that with investments, your capital is at risk. The value of investments, as well as the income derived from them, can go down as well as up and investors may get back less than the original amount invested. It is your responsibility to ensure that you make an informed decision about whether to invest with us, based on your particular objectives. If you are still unsure if investing is right for you, please seek independent advice.
The information and opinions expressed within this document are the views of (the company) and are based on information we believe to be reliable, but we do not represent that they are accurate or complete, and they should not be relied upon as such. Any information provided is given in good faith but is subject to change without notice.
No liability is accepted whatsoever by (the company) or its employees and associated companies for any direct or consequential loss arising from this document.
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