Background
The first half of this year saw investment managers hit by a perfect storm of negative performance by both equities and bonds.
Over the half-year period to the end of June, the broad US market declined by over 20%; while the US technology-focused Nasdaq index declined by almost 30%. Other major markets declined as well, with our market down 12%. Most bond markets also fell over this period.
While the Fiducian Manage-the-Manager system diversifies investments across a number of fund managers to spread the risk of any individual fund manager underperforming, this year’s market weakness has also affected the Fiducian Funds.
Fiducian’s diversified funds provide exposure across different managers and sectors and ultimately across a very large number of different stocks and securities. This provides protection by diversifying risk and, in our view, is an excellent way to invest over the longer-term, which has been proven over time. Nevertheless, no matter how well constructed the Fiducian Funds are, we cannot escape declines in the prices of the securities our external fund managers hold. The bulk of the decline in our diversified funds has come from the international sector, predominantly Technology and other global large company stocks.
The invasion of Ukraine by Russia was unforeseen and its impact has been widespread. China’s lockdown of many of its cities, factories and ports in recent months has exacerbated a global shortage of manufactured goods.
In combination, these events have resulted in the prices of raw materials, food and goods rising and consequently inflation has accelerated in most western nations in recent months. Most central banks were caught unawares and have found it necessary to resort to a rapid tightening of monetary policy, including raising interest rates.
In Fiducian’s view, interest rates could rise further before inflation is brought under control and this has raised the risk of a global recession.
Fiducian’s response
Prior to this year’s sharp market declines, Fiducian had reduced its allocation to the fixed interest sector to around 60% of benchmarks and built up cash holdings as a defensive strategy to counter expected rises in bond yields which can result in capital losses.
More recently, Fiducian has added two new international shares managers, including a ‘value’ manager and it has reduced exposure to ‘growth’ managers. New managers have also been added to fixed interest, smaller companies and emerging markets sectors.
While the structure of our funds has shifted towards a more defensive posture, our asset allocation positions and moves are designed to benefit longer-term returns. We therefore recommend that clients stay invested and ride through the current period of market volatility.
For investors accumulating assets for the long term (5 to 7 years), this current period of market weakness could provide an opportunity to invest. Dollar-cost averaging into markets could represent a sensible way to gain market exposure over coming months. There will likely be continued market volatility for a time, at least until inflation starts to decline and interest rates stabilise.
The longer-term outlook remains positive, based on solid earnings growth forecasts over coming years and low valuation metrics (extremely low by historical standards in some cases) now being exhibited in a number of markets.
Past performance is not a reliable indicator of future performance and Fiducian and the Fiducian Group does not guarantee the performance of the Funds or any specific rate of return.