Asset class valuations may have returned to more rational levels after the bond and equity shake-out of 2022 but Salt Funds Management has warned against surfing the index pre-2020 style.
In its latest ‘Global Outlook’ published last week, Salt says the “formerly popular approach” of investing in “asset class proxies” composed of hundreds or thousands of underlying securities is likely dead in the water as the easy money era ends.
“It is likely that the period of ‘wave riding’ investment strategy has now passed. Individual companies’ characteristics, business models, debt levels, efficiencies and environmental opportunities or risks will determine investment outcomes which will be quite distinct from the returns earned on any broad market index,” the Salt report says.
“For instance, it is plausible to foresee a phase in which the main market benchmark indices move sideways in ranges, whilst individual securities within them still offer scope for better outcomes. We suspect that this is probable, throughout the year or more of economic cooling which lies ahead.”
The Outlook paper says given the wide dispersion of returns from different equity investment styles of late, investors should carefully consider the rationale for holding securities “instead of simply accepting the yields on offer for deposits at banks and hoping that such exceed inflation rates”.
“… our portfolios will remain focused on quality, sustainability, and diligent concentration in the best-positioned investable entities,” the report says.
Overall, Salt expects equity returns to conform with longer-term averages in 2023 with certain sectors – notably “listed real assets” – offering potential for outperformance.
While valuations of boom-era tech stocks may have come back down to earth, investors should not expect a return trip to the moon.
“We do not anticipate a resumed bubble,” Salt says.
And after remaining underweight fixed income for some time, the manager notes that post “the severe global bond sell-off, we now see a better compensation for duration risk”.
“Thus, we are willing to increase our allocations to the Fixed Interest asset class, but with an important caveat,” the Outlook says. “We require our bond holdings to be differentiated by issuer objectives, structures and sustainability-linked outcomes, instead of scaling holdings by the size of an entity’s rolling deficit or re-financing obligations.”
The report was authored by Bevan Graham, Greg Fleming and Matthew Goodson, respectively, economist, head of global diversified funds, and, managing director of the Auckland-based boutique.
Salt has also bolstered its investment team with two new hires due to start early in February.
Neal Burghardt joins Salt as a senior equity analyst from ANZ Investments. Burghardt moved to ANZ following a four-year stint in a similar role with the Accident Compensation Corporation investment team.
Meanwhile, Jasper Struwig comes to Salt from Deloitte where he has worked as an analyst in the actuarial and insurance services division.