In the world’s biggest market, US equities turned in their worst fall (-20%) since 1962; US 10 year Treasuries their worst (-10.8%) since 1972; and US high yield bonds their worst (-10.2%) since 1989. Against this background the first half loss of the Capital Preservation portfolios of -3.13% may seem tolerable, but capital preservation it is not, at least in the short term.
The outlook for the strategy turned sour in the second quarter, after a small but positive first quarter return. Thereafter only a handful of investments produced a positive return, with Alternatives to the fore. The biggest positive contribution by a margin came from the traders at Brevan Howard through its listed vehicle BH Macro. The music royalties investment, Round Hill Music Fund, continued to prove its lack of correlation to mainstream markets even when the traditional relationships of bonds and equities fell apart as the numbers above show.
Perhaps the most interesting positive contribution came from our UK index-linked bond investment, the Treasury 2.5% Index Linked 17/07/2024. The fixed rate coupon of linkers is vulnerable to duration like any straight bond, but the relatively high coupon and short maturity date of this old bond provided enough protection against rising interest rates to produce a small but positive return from its inflation linkage. This is unlike the very long dated, very low coupon 0.125% UK linker of 2073 which nearly halved in value in the second quarter. Mark Glowrey’s (of broker Allia C&C) description of this investment as a weapon of total wealth destruction is apt.²
Further challenges lie ahead as central banks continue to walk the tightrope between reducing inflation on one hand and avoiding recession on the other. Alternatives and real assets in particular will become increasingly important.
¹ www.economist.com/finance-and-economics/2022/07/14/why-markets-really-are-less-certain-than-they-used-to-be (14 July 2022)
² Allia C&C The Daily Fix Newsletter (29 June 2022)