ˈkalɪbreɪt/ verb: “carefully assess, set, or adjust (something abstract)”
“Investing is not black or white, in or out, risky or safe. The key word is “calibrate”. The amount you have invested, your allocation of capital among the various possibilities, and the riskiness of things you own all should be calibrated along a continuum that runs from aggressive to defensive.”
– Memo from Howard Marks of Oaktree Capital Management dated 7th September 2017
There is a growing consensus among global money managers that equity market valuations are high. Goldman Sachs (GS) in its “Bear Necessities” report of 16th September 2017 is the latest to highlight rising risks of a significant equity market correction. According to GS’ proprietary Bear Market Indicator, there is now a 67% chance of an imminent 20% to 50% correction. This indicator has only twice previously been at this level – just before the dot com bubble and the Great Financial Crisis of 2008. The report however, concludes that the presence of potential mitigating factors means that an extended period of low returns is more likely than an imminent bear market for stocks.
The bottom line is no one knows when or what will stop current investor optimism; only that caution is warranted. Indeed, caution has underscored our continued allocation to public listed stocks this past year. We continually ask ourselves “What can go wrong?’ and attempt to address this by:
- adopting a disciplined portfolio re-balancing process to prepare for market adjustments/corrections; and
- seeking opportunities in special niche (thematic) investments and private equity to diversify away from the risk of owning public-listed stocks
We expect low investment returns to persist. Having zero allocation to riskier assets and staying in cash result in almost zero returns. To borrow a phrase from Steve Blumenthal of CMG Capital Management Group, we prefer to adopt a “participate and protect” strategic approach to investing.
Moving forward, we will expand our market commentary to include highlights of our approach to asset allocation. In addition, we initiate coverage of the portfolios that we carry on iAdvisor, our digital investing platform. To this end, we start by showing the YoY performance of the top 5 portfolios that we carry on iAdvisor:
Four of these portfolios are currently represented in our risk-based asset allocation models and have contributed meaningfully to annualized returns.
For balance, the bottom 5 portfolios on iAdvisor are:
Commentary and performance updates for our iAdvisor portfolios will be provided on a regular basis.