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Time to get Balanced

Time to get Balanced

Trying to time the market is not easy. If it was, everybody would do it and we’d all be rich. No such luck. The reality is, investors have to stare into the opaque future to try and figure out what the economic environment will look like and which asset classes will do well, should their expectations be realised.

Today, there are plenty of charts/data to show that we are entering a period of softer growth (our base case). Arguments can also be put forward though, to show that the economic data is bottoming and improving (not our base case).

Rather than trying to figure out the macro, we spend our time looking at valuations and adjust our exposure to risk assets accordingly. At this stage, we find risk assets such as Equities and HY bonds relatively expensive – not massively so, but enough to caution us.

Certainly there is a lot of risk in the corporate bond space given the level of increased leverage and weak covenants – leverage that has been more often than not used to finance share buy backs.

Wealth preservation is a far better strategy, than trying to pick up pennies in front of the proverbial steamroller.

We take the view that, given the current environment and uncertainty, it’s a very suitable time to take a more Balanced exposure – to hold a mixture of Fixed Income, Equities and Precious metals.

One of the many strengths of such a strategy is the low correlation of the holdings – Sovereign debt and equities tend to negatively correlated, especially in times of economic stress when there is a flight to safety. Gold and silver tend to demonstrate low correlation to most asset classes.

Indeed, when running various backtests on a Balanced portfolio, the results are very encouraging. Risk adjusted returns are higher than a typical equity only portfolio (holding US and International equities) and, depending on the time of allocation total return can be higher.

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The allocation we used in the backtest is not fully optimised – we include a larger allocation to precise metals and large cap, rather than small cap. The backtest is rebalanced annually.

So, if risk assets rally the Balanced strategy will provide a decent return.

If, however, there is a market sell off, the exposure to long duration Sovereign debt will rally, as yields fall. So, the weakness in equity prices is mitigated by the rise in bond prices.

Yields normally fall in ‘safe assets’ such as US sovereign bonds, during periods of economic weakness or a ‘flight to safety’.

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There is a need to be fairly tactical though, as yields are already very low. Indeed, over USD15trl of bonds have negative yields.

So, there is the risk that bond yields could spike higher as liquidity needs rise or inflation pick up. Should this occur though, the central banks are very likely to be significant buyers of such bond and/or put a ceiling on yields as they did in the case of Japan. They do this simply to keep the cost of debt low, so as to reduce the risk of an economic slowdown.

We do see lower bond yields in time, with the US sovereign short duration paper expected to eventually converge at levels currently seen in other developed markets, around 0% or below.

Longer term though, on the other side of the next slow-down, we expect higher bond yields and more inflation.

Given its diversification of holding, the Balanced Strategies has lower drawdowns and quicker recover periods that an Equities only portoflio:

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Given we are late in the current business cycle, the level of debt in the system globally is far higher than it was just before the Global Financial Crisis and risk assets are expensive, we believe the Balanced Strategy is very suitable for the current environment.


This material is mean for accredited clients only. Nothing in this document should be perceived in any way as a recommendation or solicitation to buy or sell any security or fund. The securities and accounts highlighted have been selected to illustrate MW Capital Management Pte Ltd investment approach and are not intended to indicate how any MW Capital Management Pte Ltd fund or account has performed or will perform in the future. The securities and accounts discussed herein in do not represent any entire portfolio or account managed or advised by MW Capital Management Pte Ltd and may not be suitable for all or any readers. Any views, forward looking statements, projections and current investments are based on assumptions and judgements. Because of the significant uncertainty inherent in any assumption and judgements we make, you should place no reliance on such forward-looking statements or views – they may not prove to be accurate and actual results may differ materially. Furthermore, they will change over time and should not be relied on in any way. There is no obligation for MW Capital Management Pte Ltd, and the company expressly disclaims any obligation, to update or alter the statements, predictions or any other information contained herein. This material is intended to be of general interest only and should not be construed as individual investment advice or a recommendation or solicitation to adopt any investment strategy. The views expressed may change without notice. Certain economic and market information contained herein has been obtained from published sources prepared by others. MW Capital Management Pte Ltd assumes no responsibility for the accuracy of such information. All investments involve risk, including the potential loss of principal. Performance data is estimated and has not been audited. Funds performance data is usually delayed by a few weeks after month end. It should not be relied on or imply future performance. 

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