About ten years ago, MoneyWeek’s editorial team put together a simple asset-allocation portfolio, implemented solely with index trackers – either exchange-traded funds or unit trusts/open-ended investment companies. The aim of this portfolio was to strike a balance between growth and protection. It didn’t attempt to forecast the future or time the market – instead, it aimed to cope well across a range of likely scenarios.
When the portfolio was first put together, the major concerns for investors were centred on monetary and fiscal policy. To quote from the very first update: “Central banks across the world are printing money. The banking system is still at death’s door. Interest rates have never been this low. Global stockmarkets have seen two vicious crashes since the start of the millennium. It feels as though the prices of most investments – shares, bonds, property – rise or fall on the whim of central bankers and politicians.”
For most of the next decade, that was a fair description of how markets worked. The banking system was gradually cleaned up (much faster in America than elsewhere) and the eurozone debt crisis passed its acute phase (although growth remained weak), but quantitative easing continued and interest rates remained low. This in turn meant that valuations of many other assets looked extremely stretched by past standards, because they were priced off government bonds in an era when yields were turning negative.
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That’s now changed. It may have been coming to an end by 2020 despite central bankers’ tardiness in raising rates, but the pandemic accelerated it by creating an inflation shock that left no justification for such loose policy. And so valuations have started to look saner. A ten-year UK gilt now yields 4.4%, a ten-year US Treasury yields 4.3%. Real yields on ten-year US inflation- linked bonds are now roughly 2%. In some respects, this makes life much easier.
A greater range of investments are now priced at a level where they can deliver reasonable returns. Previously they only made much sense if rates remained low and inflation quiescent forever.
On the other hand, we face threats that were much lower on the agenda a decade ago. Markets wobbled over unrest in the Middle East or North Korea’s nuclear weapons – but in the end, there was little reward for any analysis beyond forecasting that rates would stay low for years.
In future issues, I’ll be looking again at how the portfolio stands at present (you can see the current asset allocation above) and how it’s exposed to risks such as geopolitical conflicts and climate change, as well as financial ones such as higher rates. But reading back through these past issues and comparing them to today, one thing stands out. Investors have for the most part still not taken on board how different today looks compared with 2013, and they long for a return to a simple, low-rate world. The process of adjusting to this new reality is likely to be volatile.
|MoneyWeek’s ETF portfolio||Row 0 - Cell 1|
|Vanguard S&P 500 (LSE: VUSA)||10%|
|Vanguard FTSE Dev. Europe (LSE: VEUR)||10%|
|Vanguard FTSE 250 (LSE: VMID)||10%|
|Vanguard FTSE Japan (LSE: VJPN)||10%|
|iShares Core MSCI Em. Markets (LSE: EMIM)||10%|
|iShares Dev. Market Property Yield (LSE: IWDP)||10%|
|SSGA SPDR MSCI World Energy (LSE: ENGW)||10%|
|iShares $ TIPS (LSE: ITPS)||10%|
|iShares Physical Gold (LSE: SGLN)||10%|
Cris Sholto Heaton is an investment analyst and writer who has been contributing to MoneyWeek since 2006 and was managing editor of the magazine between 2016 and 2018. He is especially interested in international investing, believing many investors still focus too much on their home markets and that it pays to take advantage of all the opportunities the world offers. He often writes about Asian equities, international income and global asset allocation.
Cris began his career in financial services consultancy at PwC and Lane Clark & Peacock, before an abrupt change of direction into oil, gas and energy at Petroleum Economist and Platts and subsequently into investment research and writing. In addition to his articles for MoneyWeek, he also works with a number of asset managers, consultancies and financial information providers.
He holds the Chartered Financial Analyst designation and the Investment Management Certificate, as well as degrees in finance and mathematics. He has also studied acting, film-making and photography, and strongly suspects that an awareness of what makes a compelling story is just as important for understanding markets as any amount of qualifications.
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