Cash out, bonds (slightly) better as Salt seeks shelter in all-weather shares

Salt Funds Management still favours equities over cash or bonds despite a sharp negative macro-economic regime change over the last quarter.

In its latest ‘Global Outlook’ published last week, Salt says the odds now favour a “scenario of rapid, destabilizing monetary policy adjustment toward a restrictive level, increasing the likely duration of weaker market returns overall”.

“Safer sectors will remain resilient, and quality remains key,” the overview says.

However, for the time-being Salt is leaning to select ‘all-weather’ equity sectors as safe-havens rather than the traditional buffer assets of cash or bonds.

“The negative real (after-inflation) yields dogging fixed income will persist for at least eighteen months and keeps taking much higher fixed income asset class holdings inopportune,” the report says.

“After the recent and severe global bond sell-off, we do now see a better compensation for duration risk, but it remains inadequate. Within fixed income, thematic support is ready to be a prime differentiator. We acknowledge sustainable or ‘green’ bonds as a valuable emerging theme in this regard.”

But uncertainty around interest rate moves and rising concerns on credit quality and default risk require extra caution from fixed income investors with index-based strategies likely to suffer.

Greg Fleming, Salt head of global diversified funds, said in equities the manager favours listed real assets (infrastructure and property), utilities, consumer staples, healthcare and certain ‘software-as-a-service’ stocks such as Microsoft.

Fleming said Salt had tweaked multi-asset portfolios of late, including an increased allocation to listed property in its income fund.

Earlier this year Salt also added a small pinch of its NZX-listed Carbon Fund to the diversified growth strategy.

“It’s only about 2 per cent of the fund but the Carbon Fund is an uncorrelated asset and fits with the sustainable investment theme,” he said.

While almost all markets have fallen over 2022 as investors digest some unpleasant facts about inflation, interest rates, geopolitical risks and a general malaise, Fleming said NZ investors in unhedged global assets have been cushioned somewhat by the rapid decline of the local currency against the US dollar.

“The 13 per cent drop [of the NZ dollar v US currency] has helped unhedged investors,” he said. The Salt sustainable global equities fund (managed by Morgan Stanley) is currently not hedged.

“Investors might start contemplating a hedge when the NZ dollar falls below 60 cents US,” Fleming said.

The Salt report says even the most risk-averse NZ investors fleeing to cash should consider the impact of currency.

“… Cash has strongly outperformed bonds and shares so far this year, but Cash is also offering negative real returns in most jurisdictions,” the outlook says. “The appeal of Cash also depends on an investor’s base currency. For New Zealand investors, there are significant diversification benefits in allocating to the major world currencies, in a period of heightened global uncertainty and asset risk.”

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