Newsletter | October 2023

U.S. 10-year yields hit 16-year peak as Fed seen higher for longer



Investment perspective

As widely anticipated, the US Federal Reserve decided to hold its target rate range steady at 5.25-5.50%, the highest level in 22 years. In their newly released “dot plot”, at least one more hike is in the card this year and that cuts would begin later than previously signaled. The ECB raised rates 25bps to 4% and signaled that it was likely be the last increase. The BoE and SNB surprised investors with their decision to take a break from their rate hiking cycle. As Investors are internalizing the likelihood that rates will stay higher for longer, U.S. treasuries were notably weaker with the curve bear steepening. The U.S. 10-year yield rose nearly 90bps, touching its highest level since 2007. The 2-year/10-year spread, inverted by more than 100 basis points on June 30, before narrowing to 50 basis points by the end of September. In that context, bond markets posted a second consecutive month of declines across all sectors. The Global Aggregate hedged in U.S. Dollar was down 1.7%, the Global Aggregate Corporate -1.9% and the Global High Yield -1.1% while EM USD Aggregate was down 2.3% The worst performer was the US Long Treasury segment with -7.3%. Global equities continued their downward trend, with the All Country World index recording a decline of 4.1% in U.S. Dollar. Contrary to August, developed markets suffered more than emerging markets, with a decline of 4.3% and 2.6% respectively. Major US equity indices were down in September, a month that lived up to its reputation as the worst month of the year in terms of returns. The U.S. large cap declined by 4.8% while the heavy information technology index was down 5.8%. European equities held up better, with a decline of 1.6%, as did Japanese equities, up 0.3% in local currency. Chinese equities were down 2.6% in U.S. dollar while Indian equities were up 1.7% expressed in U.S. dollar. With oil prices recently reaching record highs for the year in 2023, energy prices continue to pose a significant risk to the disinflation narrative. The U.S. Dollar index was up 2.5% while gold was down 4.7%, logging a decline for the second straight quarter.


Investment strategy

Several equity indices hit their highs during the third quarter, before declining significantly, reducing year-to-date returns. The road to a soft-landing may be winding and full of diverging signals but hopes for such a scenario remain intact despite a very aggressive monetary policy. Several Western central banks have not raised interest rates further in September even if inflation remains above the 2% target. These announcements would seem to signal the end of the monetary tightening cycle and the opening of a stabilization phase for short-term interest rates. This phase of rates plateauing around current levels is likely to last several quarters before possible rate cuts in the second half of 2024. The main risks of the current soft-landing scenario are either a more severe slowdown in economic activity or continued strong growth leading to a resurgence in inflation. Even if inflation will only fall gradually, we passed the peak a few months ago, and the theme of disinflation is still relevant. Against this backdrop of moderate growth and disinflation, we find corporate bonds attractive, even in the event of rising defaults, as they offer carry with limited interest-rate risk. Like economies, markets are at a crossroads following recent price action that pushed them close to critical technical levels and into an oversold situation that are generally rare opportunities to increase market exposures.



Portfolio Activity/ News

Considering that we had reached terminal rates, we tactically increased our equity weighting in September and are maintaining this position.
Our rather cautious stance on long-dates bonds has proved judicious, and we are maintaining this positioning, while recognizing that we could selectively take advantage of any price exaggeration. We remain confident about our short-dated corporate bonds exposure. However, we recognize that even a moderate deterioration in economic conditions because of tighter financial conditions will create some challenges for highly indebted companies, causing default rates to rise. After a phenomenal rally in the first part of 2023, technology companies and, more generally, so-called growth stocks fell sharply in August and September due to an increase in the likelihood of interest rates remaining higher for longer. We took advantage of this selloff to initiate a position in a strategy focused on investing in exceptional growth companies. As a provider of diversification and return in adverse markets, it is interesting to note the very good performance of our alternative strategy bucket. Indeed, our trend-following exposure recorded a positive return of more than 5% in a complicated market for both bonds and equities.

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Newsletter | September 2023

U.S. 10-year yield jumped to 4.34% on growing concerns of supply



Investment perspective

The resilience of the U.S. economy and falling inflation led to a wider adoption of the soft landing scenario. However, the release of stronger-than-expected figures and a hawkish Fed put pressure on U.S. long rates leading to a number of setbacks in terms of return for risk assets after several favorable months. The U.S. treasuries were mostly weaker with the curve bear steepening, though yields finished the month well off their highs. In that context, bond markets delivered negative returns with the Global Aggregate hedged in U.S. dollar down 0.13% and the Global Aggregate Corporate down 0.4%. The most affected segment was the EMD complex with -1.4% for the hard currency sovereign index and -2.0% for the local currency index. One of the most prominent headwinds facing equities was the backup in interest rates. Global equities sold off 2.8% in U.S. Dollar terms. Developed markets outperformed emerging markets, with a loss of 2.3% versus 6.2%. The U.S. large cap index was down 1.6% while the equal-weight index was down 3.2%, posting their first monthly decline since February. As is often the case, last month’s risk-off environment was felt more keenly by European and emerging market equities, with declines of 2.5% and 6.2% respectively. Among emerging markets, Chinese equities were down almost 9% in U.S. Dollar. The Dollar index gained 1.7%, reversing most of prior two months’ losses. Gold fell more than 2% while oil prices continued their upward trend (WTI up 2.2%). In Europe, the gas prices jumped by 23% due to fear of LNG supply disruptions at plants in Australia. Other commodities posted negative returns. The equity volatility was unchanged at 13.6% while the interest rate volatility (MOVE index) came down sharply and is likely to get a reprieve as we approach the end of the rate hike cycle. According to the State Street Risk Appetite Index, investors’ cash allocation showed the biggest jump over a year mostly at the expense of investors’ allocation to equities.


Investment strategy

The U.S. economy proved resilient despite tighting financial conditions. Helped by encouraging signs of easing in the job market, the risk of additional Fed tightening is limited and current yield should be close to terminal rate. U.S. real yield are approaching 2%, the highest since 2009, suggesting that financing conditions are indeed more restrictive and should cool down the US economy. Credit spreads are well behaved and sit at their long-term averages. They could potentially widen if economic slowdown is more pronouned that currently anticipated. However, we do not expect them to widen massively, and even in that case falling sovereign yields would partially compensate for the negative impact of spread widening. Having more S&P 500 equal-weight exposure has been painful
year-to-date. However, the combination of cheaper valuations and some reversion to the mean does give us confidence. We remain positive on Japanese equities due to strong fundamentals, cheap valuations and loose monetary policy. While aware of the risks and challenges ahead, we recognize that the recent market downturn could provide us with an opportunity to temporarily increase our equity to slightly overweighted the asset class, to the detriment of gold.



Portfolio Activity/ News

Our asset allocation and portfolio composition remained cautiously positioned during the month, which contributed positively to our relative performance. Within fixed income, we reduced our emerging market debt sovereign and hence duration exposure. We reinvested part of the proceeds in emerging market debt corporate strategy, which offered an attractive risk-reward profile. The recent sell-off in developed market bonds has given us and our managers the opportunity to gradually increase our interest rate sensitivity as measured by duration. We pared back our credit long/short exposure but remained invested in this type of strategy to reflect our cautious stance. In Europe, we initiated a position in a dedicated flexible credit opportunity strategy that provides an exposure to credit with an active duration management expertise. Our U.S. equity portfolio has remained unchanged during the period. It’s important to highlight that our exposure comprises of a significant long/short exposure particularly suitable in the current environment. We pared back our frontier markets position for our European reference currencies and reinvested the proceeds in European or Swiss equities.

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Newsletter | August 2023




Investment perspective

In July, fixed income recorded positive returns across all sectors except for the U.S. long-dated Treasury sector (-2.2%), while global equities were up 3.7% in U.S. dollar terms. The key takeaway from July was the broadening of returns. The U.S. large cap index gained 3.1%, while the equal weighted gained 3.4%, beating the market cap weighted index for the second month in a row. The U.S. small-cap index delivered stronger gains with an increase of 6.1% for the month. Typical value sectors posted gains with energy up 7.3% and financials 4.7%, while Healthcare lagged (+0.9). Emerging market equities posted strong returns, thanks to a Chinese equities rebound of +10.8% in U.S. dollar terms. As widely expected, the Fed increased interest rates by 0.25% to 5.25% - 5.50%. In Europe, the ECB also lifted its deposit and main refinancing rates by 25 bps, to 3.75% and 4.25%, respectively, in line with market expectations. The ECB opened the door to the possibility of a pause in September. This dovish shift was probably due to falling eurozone inflation and weaker activity with manufacturing PMI at 48.9 in July. In this context, the U.S. dollar weakened against major European currencies while recording strong gains against the Japanese and Chinese currencies. Above all, the highlight of the month was the strong return recorded in the commodity complex (+10.7) – particularly in the energy sector (+16.0%). Market expectations relative to the path of the Fed’s monetary policy have shifted significantly since the beginning of the year. After its meeting last month, the Fed said that it would watch incoming data and study the impact of its rate hikes on the economy. The terminal rate market expectation currently stands at 5.4% in November and the first rate cut in 1Q-2Q 2024.


Investment strategy

Our portfolios benefited from the positive returns recorded across developed equity markets as well as emerging markets, including China. Like many investors, we have been surprised by the strength of equity markets, in the face of rising interest rates. Despite recent market upswing, we are convinced that the full effect of the central bank’s tightening cycle – which, in the U.S. tends to lag economic activity by 18 to 24 months – has yet to be felt across the economy. In addition, the yield curve has in-verted further, which is historically inconsistent with an economic recovery. A key takeaway from July was the broadening of returns and market rotation, marking the second month in a row where the U.S. large cap equal weighted index outperformed the tra-ditional U.S. large cap market weighted index. As the equity rally broadened beyond mega cap technology stocks, the volatility index fell to single digits, which was the lowest monthly reading since December 2019. We reiterate our defensive stance as we see risks building on the horizon that are not fully priced in by the market. In this context, we maintain our underweight exposure in equities with a preference for defensive strategies.



Portfolio Activity/ News

We have kept our asset allocation broadly unchanged in July, but we have done extensive work within each asset class to reflect the market dynamics and rotation. In equities, we took advantage of the recent market strength to reduce our exposure to technology as well as certain others thematics, including U.S. Small Cap Growth, and reallocated the proceeds into the S&P 500 Equal Weight and respective domestic markets across reference currencies. We reduced our positions in multi-strategy hedge funds and reinvested the proceeds into global macro and trend following strategies. Our hedge fund exposure temporarily decreased after the reduction of our event-driven bucket. The proceeds have been kept in cash pending the reinvestment in a risk parity strategy. We pared back our gold and convertible bond positions. Within fixed income, we have gradually increased our existing positions with a preference for flexible managers as uncertain-ties over the evolution of interest rates remain elevated.

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Investment Perspectives 2023 | Mid Year review & Outlook

Executive Summary

Risky assets thrived

After a tough 2022 for equity and fixed income assets, triggered by the rapid pace and magnitude of the hiking cycle initiated by the Fed and ECB, the first half of 2023 offered a relief with strong return of financial assets despite uninspiring level of economic activity in Germany and China. The Government and Investment Grade bonds had a reasonable start to the year while commodities suffered from economic growth concerns. Equity indices posted strong results, but return differences across sectors and stocks were particularly notable. The dispersion within equity markets became particularly accentuated during the second quarter after the markets had given back most of their initial strong performance at the start of the year due to the collapse of a few banks in February and March, reiterating the nasty bite fast rising rates can have on corporate balance sheets.

Narrow equity market participation

Concentrated portfolios exposed primarily to large technology stocks were rewarded. Only a handful of tech shares have been responsible for most of this year’s gains despite higher rates. Indeed, the seven-largest companies in the S&P 500, all tech companies, are up 86% on average year to date!! Meanwhile, the other 493 companies, in aggregate, have barely moved this year. In Europe, technology companies ASML and SAP have been joined by LVMH and L’Oréal as key contributors to the market surge explaining more than 40% of the index return.

U.S. growth resilient, Germany in recession

Early June, the World Bank revised its forecast for US growth for 2023 to 1.1% from 0.5% in January while China’s growth is expected to climb to 5.6%, compared to a 4.3% in January. The modest rebound in activity in China will primarily benefit domestic sectors, in particular services. Euro area GDP growth is now expected at 1.1% and 1.6% in 2023 and 2024 respectively. The key positive change underpinning this revision is the fall in energy prices and abating supply-chain disruptions.

Hawkish tone reiterated by the FED and ECB

The persistence of core inflation has emerged as a key risk as it could lead to more monetary tightening. However, lower energy prices have reduced headline inflation, with positive effects on demand and financial markets. The FED decided to hold rates unchanged in June, but most members agreed that at least one additional 25 basis points (bps) hike will be required by year end. In June, the ECB raised its deposit facility rate by 25 basis points (bps) to 3.5% and made it clear that further rate hikes should be expected at the next meeting in July, while in Japan the Bank of Japan remained dovish and will continue to support the fragile economic recovery despite stronger-than-expected inflation.

Commodities weak again

Commodity index recorded negative returns in Q1 and Q2, making it the worst asset class in our investment universe with -5.0% and -2.5% respectively as energy prices fell as global growth slowed, energy conservation and mild weather helped reducing energy demand, while rapid expansion of LNG capacities mitigated pressures in natural gas market. Prices of base metals eased due to weaker global demand in particular the slower-than-expected demand rebound in China. Additionally, increased metal supply has put additional pressure on prices. In precious metals, gold delivered a positive return (+5.23% in 1H).

Too few equities in risk-on

Our defensive allocation throughout 1H favoured alternative investments such as hedge funds for their ability to seize opportunities in periods of high volatility and to limit drawdowns and gold, which performs reasonably well in periods of stress and inflation. We maintain our relatively defensive allocation with a preference for alternatives at the expense of equities. Our allocation remains well diversified, which should benefit from some inevitable mean-reversion or provide some protection if markets take a turn for the worse.


Table of contents

  • ASSET CLASS VIEWS – 2023 - JUNE 2023

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Newsletter | June 2023




Investment perspective

In May most equity markets were rangebound as investors’ attention was gripped by the debt ceiling talks in Washington to avoid a default by the US government. Japanese equities continued to perform well, however, as did US growth stocks, in particular those of companies heavily involved in Artificial Intelligence. European and emerging market equities struggled and ended the month with small losses. While European bond yields were mostly stable, the Treasury yield curve shifted much higher as investors reduced some of their exposure to US debt in view of the risk of a first-ever US default; 2-year and 10-year Treasury yields rose by 40bps and 22bps, from 4.01% and 3.43% to 4.41% and 3.65% respectively. In this context, the US dollar performed well as it recouped its year-to-date losses against the euro, with a 3% return in May. Weakness was observed in commodity prices on concerns over softer global demand; the prices of industrial metals, such as copper and iron ore, fared poorly, as did oil prices, with a barrel of WTI oil dropping by more than 11%.

Market expectations relative to the path of the Federal Reserve’s monetary policy have shifted quite significantly during the last weeks. While there is a broad consensus that the prospect of further interest rate hikes appears to be very limited from now on, markets repriced their expectations in May for the end-2023 level of Fed funds. From a point where three rate cuts by the end of the year were anticipated, markets are now pricing in one rate cut only. This is more closely aligned with the Federal Reserve’s outlook as it has consistently pushed back against the idea of rate cuts this year already.

As often observed in the past, Democrats and Republicans finally reached an eleventh hour deal to avert the first-ever default on US government debt. The legislation that suspends the $31.4 trillion debt ceiling will remain in effect until 2025, when one is likely to face a similar situation once again.


Investment strategy

At the onset of summer, we are sticking to our defensive portfolio asset allocation. We remain cautious in view of a slowdown of economic activity, higher for longer interest rates, tighter bank lending standards, and the risk of rising bond yields. Following the US debt ceiling deal, a deluge of Treasury bill issuance is coming; this could drain liquidity from the markets and push bond yields higher which could in turn also impact stock prices negatively. The narrow rally of the US stock markets is also of concern based on past obser-vations. That is why we are also maintaining our diversified allocation. We are seeing some early signs that a rotation might be taking place in the markets. Strategies which have underperformed up to now appear to finally be attracting some attention from investors. It is too early to tell whether these are sustainable trends, but we see good fundamental reasons to remain invested in this way.



Portfolio Activity/ News

May was another flattish month for the portfolios as positive and negative monthly returns for the various underlying positions cancelled each other out. The best contributions were provided by the global technology fund, the multi-thematic fund, global convertible bonds, the systematic global macro strategy, and by frontier markets’ equities. For non-USD denominated portfolios, the strong appreciation of the dollar also contributed to the performance. Alternative strategies overall also added to the performance of the portfolios The main detractors over the past month were European value and Chinese equities, emerging market corporate debt as well as the specialty metals fund. As often highlighted, the performances of some indices this year are quite deceiving as they have been driven by a small number of stocks and sectors. The dispersion of performance between the value and growth styles, between small and large caps, between the different sectors, as well as between different regions is striking. As an illustration the spread of performances between our best and worst performing equity funds was over 40% as at the end of May!

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Newsletter | May 2023




Investment perspective

The month of April proved to be much less volatile than the previous one. The major equity indices of developed markets recorded limited gains, whereas emerging market equities ended with small losses. Despite the prospect of additional rate hikes, persistent inflation and signs of slowing economic growth, equities proved to be quite resilient. This was due in large part to acceptable corporate earnings which beat expectations that had been consistently lowered by analysts over the past months. Bond markets also ended with modest changes even if volatility remained well above-average, in contrast to the fast declining volatility observed in equity markets. The yields of 2-year and 10-year Treasuries edged lower by 2bps and 5bps, respectively, to end-April levels of 4.01% and 3.42%, with Bunds behaving in a very similar manner. With markets still anticipating a number of rate cuts by the Federal Reserve in the second half of 2023, following a final 25bps hike in May, the US dollar continued to depreciate against other major currencies; the EUR/USD parity appreciated by 1.7% to end the month at 1.102.

With more than 85% of the S&P 500’s market cap having reported, earnings have beaten estimates by 6.6%, with 77% of companies topping projections. Earnings per share growth is on pace for - 1.3%, assuming the current beat rate for the rest of the season. Sales have beaten estimates by 2.8%, with 67% of companies doing better than expected. In Europe, the earnings season is somewhat less advanced but, out of the companies having already reported their results for the first quarter, 64% have beaten earnings’ estimates and 65% sales’ expectations. Overall, these results have been supportive for equity markets, especially as most of the US mega-caps beat expectations. The results of companies such as Microsoft, Apple, Alphabet, Meta Platforms, Exxon Mobil and JPMorgan Chase were cheered by markets and contributed to the outperformance of their stock prices in April.


Investment strategy

We maintained our defensive portfolio asset allocation in April. We remain sceptical about the potential for much higher equity markets in the near term, due to an expected slowdown of the economy, tighter bank lending standards, and markets’ overoptimistic anticipation for Fed rate cuts in 2023. We continue to observe sticky inflation data and the main central banks will not want to take the risk of making a policy mistake by cutting interest rates too early. If they were to cut rates, in contrast to their current outlooks, it would be because of pronounced weakness of the economy which is not being discounted by equity markets at present. We also believe that long-term bond yields could increase from the current levels. In that case, it would allow us to increase our fixed income allocation as well as the portfolios’ duration. 



Portfolio Activity/ News

April was a flattish month for the portfolios as monthly changes for the different positions tended to be limited and ended up by neutralising one another overall. The medtech and services fund provided the best contribution, with European value equities, the real assets fund, defensive equities, and the trend-following CTA strategy also producing some positive contributions. The main monthly detractors were the global technology fund, global convertible bonds, Chinese equities, the multi-thematic fund, as well as the emerging market corporate debt fund. With the exception of global convertible bonds, all the other fixed income positions generated small positive contributions. Alternative strategies also added to the performance of the portfolios even if gains were modest. For non-USD denominated portfolios, the depreciation of the dollar meant that it was a detractor.

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Newsletter | April 2023




Investment perspective

The month of March was most eventful for capital markets. Three US banks collapsed following a run on their deposits and the Swiss government forced through the takeover of the 167 year-old bank, Crédit Suisse, by its rival UBS. This banking turmoil triggered a fall of equity markets and a plunge of bond yields. Markets also quickly repriced their expectations relative to the Federal Reserve’s hiking cycle, with rate cuts being anticipated for the second-half of 2023, once again. US federal authorities intervened quickly to protect both insured and uninsured deposits at Silicon Valley Bank and Signature Bank to restore calm in the markets. The merger of CS and UBS also contributed to remove some market stress even if Deutsche Bank found itself under heavy selling pressure for a brief period. The second half of March saw global equity markets rebound strongly and end the month with modest positive returns. The best performing asset in March was gold which benefited significantly from lower real bond yields and a weaker US dollar to appreciate by 7.8%.

A high level of volatility has been observed in bond markets for some time now, as a result of the fast pace of monetary tightening since early 2022. The moves that took place in March, however, proved to be even more extreme. The yields of 2-year and 10-year Treasuries collapsed from early-March levels of 5.06% and 4.08% to closing lows of 3.77% and 3.38%, respectively, a most significant shift of the US yield curve. By the end of March, expectations for the end-year level of the Fed’s fund rate had also dived to 4.35%, compared to an early-March level of 5.55%. In the Eurozone bond markets, comparable trends as in the US were observed, even if to a lesser degree; markets are now pricing in a end-year ECB policy rate of 3.4%, in contrast to 4% at the beginning of March.


Investment strategy

Our defensive portfolio asset allocation was maintained through March. We were close to being able to increase our fixed income allocation as bond yields kept on rising, but their sudden drop has prevented us from making this move so far. We had also got very near to our first target on the EUR/USD parity, with the objective of decreasing our dollar exposure. Then again, the unexpected banking turmoil trig-gered a reversal of the prevailing trend, taking away the opportunity to sell the US currency. We admit being some-what puzzled by the ongoing confidence of equity markets in view of the signals sent out by the bond markets. Were the Fed to cut rates this year, as currently priced in by markets, it would be due to a deeper slowdown of the economy, not the best framework for equities. That is one of the reasons why we have kept our underweight allocation towards equities.

The past month was a mixed bag for alternative strategies, but we continue to view them as an integral part of the port-folios. This is also the case for gold which has continued to provide real diversification and to behave more like a long duration asset, bringing defensive qualities to portfolios.



Portfolio Activity/ News

March was a modestly negative month for the portfolios as equity, fixed income and alternative asset classes all posted negative returns. US and European value funds were the largest detractors in the equity allocation, whereas the global technology fund produced a strong contribution as growth stocks outperformed. Our underweight duration exposure and our preference for credit strategies meant that most bond funds ended with limited monthly changes, except for the emerging market corporate debt fund which experienced a larger drawdown. The brutal reversal of bond markets also proved costly for trend-following strategies, in reason of their very short positioning on rates. In contrast, the discretionary global macro strategy performed very well. For non-USD denominated portfolios, the depreciation of the dollar also translated into a negative contribution for the portfolios.

In March two new funds were added to the model portfolios. The first one is a US value fund which replaced our previous US value one. The reasons for this change were an under-whelming performance of the prior fund recently, as well as an overweight exposure to the energy sector within the new fund. We also trimmed our discretionary Global Macro and trend-following CTA strategies to make room for a systematic Global Macro strategy based on fundamental and price-based indicators. The fund combines carry, fundamental, trend-following and value/reversion strategies, and displays a remarkable track-record over an extended number of years.

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Newsletter | March 2023




Investment perspective

The early-year optimism in financial markets gave way to renewed concerns over inflation and even tighter monetary policies, triggering a significant drop of bond markets. As often observed in 2022, the volatility in bond markets rose noticeably and impacted the momentum of other asset classes. The yields of 10-year Treasuries ended the month 41bps higher at 3.92% with those of Bunds with a similar maturity climbing by 37bps to 2.65%. While European equity markets proved to be resilient, as the Euro Stoxx 50 Index edged 1.8% higher, emerging market and US ones gave back a large portion of their January gains; the MSCI EM Index fell by 6.5% and the S&P 500 Index lost 2.6%. In this context, the US dollar benefited from the widening of the interest rate differential between Treasuries and Bunds, and from its safe haven status, to record a solid performance against other major currencies. A strong dollar and higher real interest rates meant that gold saw its early-year gains being erased, while other commodity prices also dropped.

Early-year market confidence over the decline of inflation appears to have been replaced by concerns that it will be more sticky and remain higher for longer than previously anticipated. This change of outlook was triggered by the publication of inflation data which was above forecasts, on both sides of the Atlantic, and was reflected by the steep rise of inflation expectations. The correction of bond markets in February means that they are more closely aligned now with the outlooks of the Federal Reserve and the ECB, with an implicit admission that policy rates will end up at much higher peak levels than previously expected. Markets are now pricing in peak policy rates of 5.5% in the US and 4% in the Eurozone, compared to January 2023 lows for peak rates of 4.7% and 3.05% respectively.


Investment strategy

We maintained our defensive asset allocation in February. Thanks to an underweight allocation towards equities and a low duration of the fixed income exposure, the drawdown of portfolios was not too deep. In last month’s newsletter, we had reiterated our scepticism about the markets’ optimistic outlook over a pivot by the Fed in the second half of 2023 and were therefore not surprised by the retreat of equity markets in view of rising bond yields. We believe that equity risk premiums are not attractive at this stage, leading us to remain cautious, especially in view of concerns over profit margins and the path of earnings.

We are closely observing the level of European bond yields as we are approaching a point where we would likely increase the duration of the portfolios. The latest developments in bond markets also mean that the recent appreciation of the US dollar has stalled. As we did not reach our first target on the EUR/USD parity, we have not yet reduced our dollar exposure for non-USD denominated portfolios.



Portfolio Activity/ News

February was a negative month for the portfolios as both the equity and fixed income asset classes were detractors, while hedge funds produced only a marginal positive contribution. For non-USD denominated portfolios, the appreciation of the dollar provided a welcome positive contribution. Some of January’s best performing funds fared the worst during the month under review; the metal mining fund and Chinese equities were the largest equity detractors, whereas emerging market corporate bonds and the long duration investment-grade fund were the biggest fixed income ones. European Value and cyclical equities provided the best contributions within the equity asset class and the short duration European high yield fund generated the only positive fixed income contribution.

In February two new funds were approved by our investment committee. The first one runs a systematic Global Macro strategy based on fundamental and price-based indicators. The fund combines carry, fundamental, trend-following and value/reversion strategies, and displays a remarkable track-record over an extended number of years. The second fund is a concentrated US Value fund, which seeks to invest into great businesses trading at a “bargain”. Since its inception in 2008, the strategy has outperformed both its Value bench-mark and the broader S&P 500 Index.

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Newsletter | February 2023




Investment perspective

 Financial markets got off to a very positive start in 2023 as investors took the view that the likelihood of a soft landing was rising despite the hawkish tone from the Federal Reserve and the European Central Bank. In this risk-on environment, the vast majority of equity markets posted above-average monthly gains, long-term bond yields decreased, credit spreads tightened, and the US dollar continued to depreciate. The MSCI World index in local currencies climbed by 6.4%, with the Euro Stoxx 50 index rising by 9.7% and the Hang Seng index by 10.4%. The yield on the 10-year Treasury note dropped by 36bps to 3.51%, with US and European high yield credit spreads contracting by 49bps and 68bps respectively. Other strong gains were also observed on industrial metals, as a result of the anticipation of renewed demand from China, and on the price of gold. Maybe a little surprisingly, oil prices ended the month lower, despite the boost from the reopening of China, while gas prices continued to slide at a fast pace. 

At the time of writing, the Federal Reserve has just hiked its Fed fund rate by 0.25%, as fully anticipated. The more relevant outcome of the FOMC meeting were the comments by the Fed’s chair, Jerome Powell, on the future path of the Fed’s policy. Powell repeated that more rate increases were needed and that rate cuts in the second half of the year were unlikely. This goes against markets’ expectations for two rate cuts by the end of 2023. What was more surprising was that Powell did not push back more against the recent easing of financial conditions, leading markets to extend their early-year rally, with equities ending the trading session higher and bond yields declining. The ECB and the Bank of England also matched market expectations by hiking interest rates by 0.5%. The ECB signaled its intention to raise interest rates by another 0.5% in March and will then evaluate its policy depending on data. As was the case after the Fed’s decision, markets are continuing to rally, with bond yields dropping quite noticeably. 


Investment strategy

At the onset of 2023, our asset allocation is composed of an underweight equity exposure, an allocation to fixed income which is close to neutral and an overweight exposure to hedge funds. Taking account of the strong performance of equities in January, we are sticking to this asset mix for the time being. We fear that markets could be overconfident in their dovish outlook relative to monetary policies and to the path of earnings. With bonds offering positive yields once again, we believe that it makes sense to hold more balanced portfolios and no longer to rely just on the equity asset class to generate portfolio performance. It is also reassuring that the current valuations of some of the traditional assets offer a better starting point for future portfolio returns than a year ago, when only a few of them could be considered cheap. Global value stocks, emerging and European equities, as well as investment grade credit are some of the assets that offer attractive valuations.

For non-USD denominated portfolios, our allocation to the US dollar remains underweight but we prefer to wait before reducing it further. From a medium to long-term perspective we would expect the dollar to depreciate but it continues to offer defensive qualities were markets to turn.



Portfolio Activity/ News

January was a strong month for the portfolios. With both bond and equity markets rising simultaneously, the majority of funds contributed to the performance, as to be expected. European Value equities, the metal mining fund, the global technology fund, Chinese equities, and the US Value fund provided the best contributions within the equity asset class. The only equity detractor was the healthcare fund, as the more defensive sectors such as healthcare, consumer staples and utilities ended the month lower. The best performers in the fixed income asset class were emerging market corporate bonds and the long duration investment-grade fund. In the alternative space, the Global Macro fund provided the best contribution, whereas one of the long/short equity funds, with a barely positive net exposure currently, ended the month with a small loss. The other hedge funds provided only marginal contributions.

Following a tough year for many strategies, we are confident that active managers will be able to generate more alpha in 2023. We would expect market dispersion to be high and to represent a favourable environment for good stock pickers. This extensive dispersion should also be helpful for hedge fund managers, and we are comfortable with our overweight exposure to these alternative strategies.

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