That gives you a feel for what the brain’s trust at the fund management firm are seeing at the moment.
Some of the key points are that they question whether the tradition 60:40 asset allocation in balanced funds to equities and bonds respectively is fit for purpose in the current environment.
In the first three quarters of this year there were negative real returns for all global asset classes except commodities.
“It is very rare for only a single asset class type to log price gains across a full nine-month period,” they say.
Added to that severe losses from bond funds have had a marked impact on portfolio returns.
“There are thus clear problems in recommending the so called ‘classic balanced’ asset mix of 60% equities to 40% bonds under current market conditions.”
With the way markets have gone a classic US balanced portfolio would have recorded -26% real returns in the first nine months of this year.
This “would be the worst single year’s outcome since 1931 (when the real return was -31% for the full, depths-of-the-Depression year).”
They say the next couple of years will likely determine whether the traditional asset allocation mix will revert to a beneficial diversification structure or will be found wanting.
They says the current bond bear market is the worst ever recorded, in terms of negative total returns logged on a wide range of debt securities.
The equity bear market, by contrast, remains moderate by historical standards.
“Equities will recover, given time, but bonds face a more fundamental challenge due to yield levels still being inadequate given inflation and credit risk and a new environment of terminated QE support and nascent steps towards QT)."
Salt says no catalysts yet exist for a broad, multi-market rally in either shares or bonds. However, toward year-end we may see stabilisation.
Valuations are much better but high-quality holdings are still strongly preferred.
The manager is retaining its central market views which include that equities will see average annual returns close to their long term norms in the next three years, listed real assets have superior defensible yields and cyclical tailwinds. Salt prefers equity to fixed interest or cash exposure at the moment.
“The negative real (after-inflation) yields dogging fixed income will persist for at least 18 months and keeps taking much higher fixed inome asset class holdings inopportune.”
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