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Preparing your portfolio for change

11 May 2022 Investment Styles, About Alliance Trust, How to Invest Money Week


Investors face a macroeconomic backdrop which is very different to the one most have grown up with. How can they prepare their portfolios for a rapidly changing world?

It's a cliche to say that markets dislike uncertainty. Uncertainty and change are constants in both life and markets. Indeed, one of the key roles that markets play within society is to enable investors as a group to manage this uncertainty, which is just another name for "risk", in all its manifestations, more effectively. That said, investors can be forgiven for feeling unusually tentative about what the future might hold for markets right now.

The Russian invasion of Ukraine is not only a horrendous human tragedy, but has also put paid to many assumptions about the global geopolitical backdrop that many – perhaps complacently – had held to be true. Many leading commentators have argued that the era of globalisation and international co-operation that followed the collapse of the Berlin Wall and the Iron Curtain is now firmly at an end (1). The sanctioning of Russia and Russian assets has abruptly reminded international investors that the security of property rights is a vital consideration for any investment, and one that has perhaps been taken for granted for too long.

An unwelcome return

Perhaps of even more significance is the unwelcome return of inflation, which has made a striking comeback across most developed markets. Consumer prices are now rising at levels not seen since the early 1990s (in the UK (2)) or even the early 1980s (in the US (3)). Up until late last year, central banks had been describing this inflation as "transitory" (4), implying – rightly or wrongly – that inflation had been driven mostly by the global economy rebounding from the unprecedented circumstances surrounding the Covid-19 pandemic and the resulting lockdown.

Yet while central bankers may still hope that inflation will ebb over time, they have been forced to "retire" the term and are now talking more aggressively about tackling rising prices. Interest rates have already started to rise in both the UK and the US. Meanwhile global bond yields, which have spent many years declining, are now moving steadily higher. One of the clearest indicators of this shift is that one of the strangest financial phenomena of recent years – the negative-yielding sovereign bond – is once again almost extinct (5).

This presents a macroeconomic backdrop which is very different to the one against which most of today's investors – both institutions and individuals – have worked and saved during their lifetimes. It's always dangerous to use the words "it's different this time". But it is very clear that the investment backdrop poses challenges and risks which are very different to those that faced investors in the wake of the 2008 global financial crisis, for example.

Times like these

What can investors do to shield their portfolios from the challenges of this new era? Diversification remains vital, perhaps even moreso than in the past. The post-2008 era has been market by the outperformance of US markets (6), so taking a global view of markets is vital for investors who hope to find pockets of opportunity.

But there's more to diversification than simply geography. Diversifying by investment style matters too. For example, in recent years "growth" stocks have hugely outperformed "value" stocks. In a more inflationary world, that may reverse. But any shift is likely to throw up opportunities in both rapid-growing companies which fall out of favour, and overlooked stocks which are better-placed to cope with inflation than markets give them credit for.

Resilience matters too. Regardless of the backdrop, reacting to every new headline or unnerving inflation statistic is never going to be a good investment strategy. Investors still need to be able to rise above the market noise and to think long term – to consider the merits of each individual investment on its own terms, to hunt out the best ideas on a global basis, and to act with conviction when a solid prospect has been uncovered.

Finally, as inflation starts to focus investors' minds on real returns – on maintaining the purchasing power of their savings – they may well start to focus once again on the importance of dividends as a key component of long-term returns. As the most recent annual Barclays Equity Gilt Study shows (7), £100 invested in UK equities at the end of 1899 would have been worth just £167 (in inflation-adjusted terms) in 2020, whereas reinvestment of dividends would have increased that sum to £32,025.

For investors keen to find funds that might help them to weather this uncertainty, the Alliance Trust investment trust offers all three of these features – geographic diversification, an alliance of expertise and a 55-year track record of dividend increases. 

7. Barclays Equity Gilt Study 2021

When investing, your capital is at risk. The value of your investment may rise or fall as a result of market fluctuations and you might get back less than you invested. TWIM is the authorised Alternative Investment Fund Manager of Alliance Trust PLC. TWIM is authorised and regulated by the Financial Conduct Authority. Alliance Trust PLC is listed on the London Stock Exchange and is registered in Scotland No SC1731. Registered office: River Court, 5 West Victoria Dock Road, Dundee DD1 3JT. Alliance Trust PLC is not authorised and regulated by the Financial Conduct Authority and gives no financial or investment advice. 


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