Questions & Answers – Part 1

Q: Given these inflationary times, rising interest rates and geopolitical tensions, what are you saying to clients about investment strategies for the next couple of years?

• Investors as opposed to speculators have longer term objectives for how money should serve them and the needs of those they care about.
• For the most part these objectives are stable, and there is a careful plan mapped out to provide the highest statistical probability of a successful investment experience. We provision for volatility and build in tolerance for the inevitable unforeseen.
• Unless there is a need to change strategy, reacting is likely to be counterproductive – a bit like changing lanes too frequently on the motorway.

Q: On the inflation front, do you have a feel for how this will play out in New Zealand in the next year or two, and what impact will that have for investors?

• Yes, I certainly have my opinions, but my view of short-term trends could well be incorrect, just like that of the next person, or any number of commentators. It remains important when taking fiduciary responsibility for advising clients prudently that I focus on the evidence from the independent research in finance.
• Having said that , we weight client portfolios more strongly to internationally diversified markets and less relatively to NZ than many others.
• Inflation when it comes initially adversely impacts both real assets and financial assets. We have seen shares dip and now everyone is very conscious that residential property values are falling.   This is an initial response to the need for leveraged participants to retire increasingly unaffordable debt. Secondly new purchasers cannot afford to borrow at the same levels with higher interest rates.  However, once this adjustment rolls through inflation protection will best be achieved by holding these same assets.  Share market returns beat inflation over time.  Cash is the worst store of value possible.  Inflation is basically a thief in your wallet reducing the purchasing power of cash.

Q: Are there any particular asset classes that you expect to perform well in the short-term, or alternatively which may present red flags?

• We do not make short term tactical moves with client funds. Underpinning our portfolios is a strategic asset allocation.  This alters somewhat in sync with the evidence of the drivers of financial market returns as researched by the most credible academics in finance.
• Having said that, we were well aware that after a 30 year run of falling interest rates culminating in rates hitting new found lows near to zero through the pandemic, the bond market offered particularly poor value. Secondly, it seemed predictable to me that Central Bank quantitative easing programmes would eventually spawn inflation.  Accordingly, last year our investment committee made some strategic changes to portfolios,  namely to encourage clients one step further toward growth assets if possible; to shorten duration/ bond term risk within the defensive side of portfolios; and to add inflation resilient assets such as infrastructure.
• The rapidly rising interest rates over the past few months have now re-set asset valuations, and normalised some of the risk and reward dynamics toward more traditional levels.

Q: Many investment advisors take the view that it is wise to sit tight on volatile markets and stay true to long-term investment plans. What is your view?

• Whilst we also subscribe to a disciplined investment approach, we are never doing nothing on client portfolios. We routinely rebalance back to mandate, which provides a framework for systematic profit taking from winning asset classes and reinvestment across market factors that may be out of favour temporarily.