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Asset Allocator

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Inflation scares test portfolios' mettle; Anderson's 'irretrievably broken' warning for managers

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Pricing up

The reinflation narrative turned another page yesterday, courtesy of a higher-than-expected US CPI print. But this latest plot point didn’t prove particularly pleasing for market observers.

As most allocators have come to expect, a renewed fear of price rises resulted in tech and other growth stocks being knocked back. More notable was that those sectors that have rebounded in expectation of economic recovery – like financials – were also hit.

This may suggest concern about inflation’s overall impact on the US or even global economy. Alternatively, it may simply reflect the fact that reopening trades had got ahead of themselves. But the case that inflation narratives have done likewise is just as compelling.

There are still plenty who think it is far too soon to be materially concerned. For them, the operative word remains “transitory”: the latest figures are being driven by both an easy comparator in 2020, when oil prices were much lower, and supply shortages affecting areas like used cars.

There's likely to be more of this ahead: Jerome Powell was perceived as being under pressure on inflation as far back as February, and the Fed chair will have to fight harder and harder to convince investors that he is sanguine over price pressures.

Allocators, of course, like to plan months if not years ahead, and the signals do point to a degree of asset price normalisation. German 10-year bund yields, for example, are on the verge of turning positive for the first time in two years.

For UK wealth managers, the arrival of a ‘liquid real assets index’, launched by Elston Consulting this week, is also a sign of the times. Portfolios are adjusting to a different set of circumstances – one in which inflation hedges will become more highly valued. But while there will be panics along the way, these too look likely to prove short-lived for the moment.

Going for broke

One of the doyens of growth investing, James Anderson of Ballie Gifford, signed off today in typically forthright style. Anderson isn’t due to step down from Scottish Mortgage until April next year, but he used the occasion of his 22nd and final annual report to lay down some thoughts on active management.

Those weren’t particularly pretty: the world of conventional investment management is “irretrievably broken”, he writes, adding that his own biggest failing, as he perceives it, was to have been “insufficiently radical”.

Investing, he says, should be more about extremes:

Despite what the CFA foists on the young and innocent, you cannot choose a level of risk and return along a classic bell-curve to suit your portfolio [...] that is neither accepting the deep uncertainty of the world, nor acknowledging that the skew of returns is so extreme that it is the search for companies with the characteristics that might enable extreme and compounding success that is central to investing.

But distraction through seeking minor opportunities in banal companies over short periods is the perennial temptation. It must be resisted. This requires conviction. The share price drawdowns will be regular and severe. 40 per cent is common.

Those words are a challenge to those running client portfolios – not least those that are risk rated – as much as they are to fund managers themselves.

To Anderson, it follows from the above that the best investments require a degree of faith, accepting and embracing the fact that holders will often be “overwhelmed and puzzled more than comprehending”, and “willing to embrace unreasonable propositions and unreasonable people in order to make extraordinary findings”.

A lot of allocators would sympathise with these thoughts, but having the scope – and the freedom of action – to convert this thinking into reality - and to see it through - will be beyond most, in no small part because of the demands of clients and management. And there’s no obvious way to square that circle, other than trying to accommodate the mavericks at the edges of a portfolio.

Dialling down

Hargreaves Lansdown’s latest market update puts some more concrete figures on the retail trading boom: its clients made six million share deals between January and April this year, up 50 per cent on the same period in 2020.

That pushed revenues more than 20 per cent higher year on year, but there was also further confirmation that this ballooning interest is, inevitably, starting to come back down to ground.

Chief executive Chris Hill said the company had already “begun to see a reduction in share dealing volumes in both UK and overseas trades”. The point of interest for Hargreaves and others is where the new equilibrium lies – whether it will be closer to six million trades or four million – and the implications that has for the investment industry.  

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