As you are aware, 2022 has been a difficult year for most asset classes. Just how bad?
Well, for bonds, it has been one of the worst-performing years in the last 90 years. A long-term bond portfolio is down roughly 20%, and an aggregate bond fund is down 14% as of this writing.
Usually, when equity markets are in bear territory, we get some reprieve from bonds. Even in 2008, when stocks were negative, bonds generated a positive return.
This has not been the case in 2022, unfortunately. The average 60/40 balanced fund is having one of its worst years on record, both on the US and the Canadian side.
Portfolio Transactions & Adjustments
We’ve made some strategic transactions to reduce some of the impacts of current markets. These changes have provided some good relative results, but -as with everything else this year- the absolute returns are still negative. The positioning, however, sets us up positively for when things stabilize and recover.
Firstly, as you know, over the last several years, we’ve been bearish on bonds and have made a large shift into Alternative Investments, which have brought us a positive return this year and continue to perform consistently.
We’ve continued to add real assets, such as agriculture, infrastructure, and power producers to our portfolios, which have embedded inflation protection.
Other changes to note
We eliminated our emerging markets exposure at the beginning of the year and have no direct exposure to China.
We also reduced our exposure to Europe, hedged the Euro and eliminated some of the higher-valued tech companies.
We used the liquidity to purchase additional defensive positions -similar to the ones we already own- with pricing power, that are recession resilient and have strong balance sheets.
Our healthy exposure to the USD, the “safe haven” currency, has also helped to offset some losses.
Although we haven’t seen the full fruits of our labour, when things turn, and they will turn, we will benefit from these adjustments on the upside.
Where are we now?
Right now, the level of pessimism is extremely high; similar to 2008, when financial institutions were defaulting, and jobs were scarce.
Markets are as pessimistic now as in the early 80s when rates were at 18%. Even as much as in the Great Depression.
Traditionally when individuals and markets are this pessimistic, the next 3 to 5 years have historically been quite strong. Needless to say, the monetary policy, support programs, strong employment and most balance sheets are much more robust today than they were in the past.
In addition, when we’ve seen 20% drawdowns in the US market (as a reference, we hit -25% on Oct 12), the following 3 and 5 years have been very strong.
We know this is a difficult time for the economy and the world in general; it’s even difficult for investors to look at their statements these days. But over the last 25 years, we’ve seen many similar instances with slightly different circumstances.
A portfolio built with a robust investment process and a focus on the long term always has and always will pay off.
On behalf of the TWM Group, thank you for watching, and see you next time.