An investment portfolio today should consist predominantly of US assets. Impact investing is sustainable investing 2.0 and long duration assets continue to struggle. That is what independent investment expert Jan Longeval said during the closing debate of Portfolio Day, which Investment Officer organised in Brussels last Thursday.
Next to Longeval, independent specialist Jan Vergote and Private Bank Edmond de Rotschild’s strategist Frank Vranken also took part in the debate, as did Editorial Manager Jurgen Vluijmans of Investment Officer BE. Moderator was Michaël Van Droogenbroeck. The debate was the closing event of a meeting whose theme was ‘The New World Order’.
“In the emerging markets you often have unsound governance. In the new world order, those markets are increasingly folding in on themselves, which will exacerbate the problem of unsound governance. Europe has its own problems and is increasingly bogged down in a gigantic planned economy, which will put further pressure on productivity. Demographics are also against us,” said Longeval.
Demographics on its side
“Europe is facing a shrinking labour force. Both factors will lead to zero growth in the economy. In the US, shareholders’ interests are best served. They also have the demographics on their side. That is why you should invest 60 to 80 per cent in the US,” Longeval added.
Frank Vranken believes that the New World Order has been underway for some time, with the beginning of the end of globalisation. “In the emerging market, the middle class has grown, in the developed markets it has shrunk. The contrasts are getting sharper, now between Russia and China, among others.”
60/40 portfolios
The classic 60/40 portfolios experienced their worst year since 2008 due to a synchronised decline in equity prices and rising interest rates. As a result, performance has been negative for the first time since that period.
“I find it incomprehensible that you continue to walk around with a portfolio that is heavily invested in bonds at negative nominal and real interest rates. I find it very strange that nobody expected the normalisation of interest rates. I think the 60/40 portfolio was dead when interest rates were negative in Germany, now we are positive again. We are seeing a revival of the 60/40 portfolios, not their death.”
Jan Vergote called on asset managers and banks to do something about the ‘cost of ownership’ of bond funds. According to him, this is a structural problem, because the cost is not in proportion to the return. In response to Jan Longeval’s statement, he considers investing 60 to 80 percent in America a “dangerous proposition because of the cyclical aspect and the currency risk”.
Repricing the World
In response to the assertion that the rise in interest rates and inflation is causing asset prices to be repriced, Vranken replied: “We went through a decade that was completely abnormal, with negative interest rates and free money. Then came a stop and go policy after Covid, and the horse started to drink. Today we are moving towards normalisation, but we are not there yet. The Fed will have to reduce its balance sheet even further. That is why asset class prices are being adjusted, both on the fixed income and equity fronts.”
Vluijmans noted that everything that worked well in recent years was long duration thanks to a low discount rate. “That party is now over. It will take some time before the hot air has drained out of the system,” said Longeval. “That process is ongoing and could take years. I tactically choose the most traditional safer investments and to stay away from overheated zones.”
Vergote added that the risk premium in the US is still only 1.6%, below its long-term average and therefore in the danger zone. Vranken argues that the risk premium is relative and was artificially pushed down by central banks. “First we need a normalisation, and then we can look at the risk premium.”
Private assets
“You can put together a liquid portfolio of US leveraged small caps that shows a similar evolution as private equity. The volatility of private equity is apparently lower because the frequency of measurement is lower, and there are doubts about the valuation of private equity during moments of crisis.”
“Private debt is a different story, because you find interesting risk-return ratios there.” Vergote agreed and cited the example of Belron, which, with a current valuation of EUR 21 billion, has risen by 600 percent since 2007 (source: FT 21 June). “I advocate transparency of the positions in the portfolio,’ he added.
Vranken argues that you should invest in private equity for the long term and reinvest the proceeds, depending on the cycle. “For those who will soon receive capital calls, it is a good thing, for those who are close to the exit it is a good thing.”
Sustainability
Now that everything has become sustainable, nothing is in fact sustainable any more. That brings a risk of dilution and greenwashing. That is Jan Longeval’s starting point. Asset managers will increasingly be required to demonstrate the concrete impact they have on society. Impact investing is the future of sustainable investment.
“Impact can be measured on the basis of the IRIS criteria of the Global Impact Investing Network,” said Longeval. Vergote argues for more transparency and raising the bar for each sub-aspect, both for E, S and G.
“You can’t be against ESG, given the world we live in, given climate change and other criteria. But we have to deal with sustainability criteria in a more sustainable way,” said Vranken.
This article first appeared in Dutch on InvestmentOfficer.be.