How markets have performed (to end November)
A divergent month of financial asset performance triggered by the US Presidential election. This led to developed market equities beating emerging market equities and a sharp re-pricing of bond yields in anticipation of fiscal stimulus under a Trump presidency. On the last day of the month Oil prices rose strongly (nearly 10% in USD on the day) in reaction to the OPEC agreement to restrict supply.
What we are thinking
We briefly covered the early conclusions of our ‘House View’ discussion in last month’s newsletter. A cornerstone of our view is the ‘unfulfilled expectations’ of developed economies’ electorates. Since the industrial revolutions of the 1800’s successive generations have grown accustomed to a standard of living which was meaningfully greater than that of their parents – driven by improved education, capital investment and innovation. This created extraordinary economic growth through the late 19th and early 20th century, which has moderated since the 1970’s. The easy gains of investment in education and capital have been reaped, and recent innovation has failed to produce the transformational economic practices of the original industrial revolution. We therefore expect the pace of economic growth, productivity and innovation to disappoint relative to these historic benchmarks. Viewed objectively against the full span of human history, we live in a rarefied environment of economic and welfare advancement – however today’s electorates are basing their expectations on the exceptional experience of their immediate ancestors – expectations we believe will continue to be disappointed. On this foundation, populist mandates will thrive and we expect further moves in this direction over the next election cycle. We are positioning portfolios for an inflationary environment, with a selectively positive view on equities and a dim view on debt assets, especially those of longer duration.
Our latest view on asset allocation positioning
Insights from some of our managers
Value managers have enjoyed a renaissance in 2016, after a protracted period of underperformance. During a recent update meeting one of our value managers was particularly upbeat on the breadth of opportunities identified by their investment opportunities – ranging from specialist Chinese textile manufacturers to European insurance companies and putting their cash reserves to work. This is a stark change from 18 months ago when they held significant cash in the face of an expensive market, where only volatile oil and mining stocks traded on cheap valuations.
Private Equity is an attractive asset class for investors who are able to accept the illiquidity that it entails. However, there has been a lot of money raised by PE funds and many who have not deployed all their cash, resulting in record levels of capital to be invested (approx. $1.3 trillion according to Cambridge Associates). Large buyout acquisition multiples of 10.2 times EV/EBITDA are back to levels last seen in 2007. This does not bode well for the broader market. We believe that opportunities remain for above average returns, but investors must be selective in their allocations. We favour Secondaries, Co-investments, European VC and have a bias towards smaller funds with sector specialism.
About Wren Investment Office
We take a bird’s eye view of a client’s assets, create a comprehensive wealth map and advise on a solution to help meet our client’s expectation. We work with our clients to understand what they want to accomplish and craft a financial plan to achieve their goals. The freedom of being a firm professionally owned and managed affords us the opportunity to source, assess and assemble the finest providers from the financial sector. We believe this helps us provide a robust structure for the management of family wealth. We are part of a global alliance of independent multi-family offices, with MdF Family Partners in Continental Europe and WE Family Offices in the US, that shares the same investment philosophy and the same commitment to providing unconflicted advice, a simple fee structure and adherence to putting clients’ interests first.