As we reflect on a tumultuous 2022, one lesson stands out: the importance of genuine diversification. In the face of uncertainty, many investors found themselves exposed to risks they hadn't fully appreciated, with traditional balanced portfolios experiencing their worst returns since the global financial crisis. The pain of 2022 is a stark reminder that markets are unpredictable, and that what worked yesterday may not be suitable for the challenges of tomorrow.
As we discuss in our white paper, Sunrise on Venus, long-term inflation could be substantially higher than markets expect. This is a game changer for multi-asset portfolios, as inflation can flip the ‘traditional’ relationship between bonds and equities. Meanwhile, high stockmarket valuations point to potentially disappointing returns ahead for assets that were the winners of the last decade.
To thrive in the coming environment, investors must adjust their portfolios. Traditional balanced funds, while suitable for normal booms and recessions, offer little hope of outperforming cash in a stagflation scenario. However, there are some healthy alternatives.
The Orbis OEIC Global Balanced Fund is designed to navigate diverse market environments, including periods of stagflation. Our equity exposure spans several dozen stocks that we believe offer better value than fully priced world markets, providing what we think are much more attractive prospective returns. While passive funds are heavily concentrated in the US, giant companies, and technology shares, most of our holdings are outside the US, mid-sized or large rather than giant, and in other sectors.
Our approach to fixed income is also different. Instead of passively tracking bond indices, our portfolio comprises assets capable of weathering the challenges of stagflation. This includes inflation-linked bonds, gold, some corporate bonds, and cash.
We also maintain a substantial exposure to relative value, purchasing attractively valued shares and hedging out the associated stockmarket risk. If our stocks perform better than their local markets, this hedged equity exposure can generate positive absolute returns, irrespective of the economic climate.
When you piece it all together, you get a genuinely diversified portfolio that sets itself apart from conventional 60/40 or passive strategies (see below). For investors seeking diversification and long-term returns in their portfolios, the Orbis OEIC Global Balanced Fund could play a helpful role.
Balancing the blend
For asset allocators, 2022 illustrated the risks of being all-in on a single style. Even if investors had 50% of their portfolio in an active growth fund and 50% in a passive fund, that portfolio suffered greatly when growth (and increasingly growth-heavy passive) funds fell from favour. An investor holding that mix saw a drawdown of 22% and would still be down 14% today.
We believe there's a better way. By blending in good active managers with different styles, investors can balance out the overall risk of their portfolio. Going back to 2022, an investor who blended a contrarian value strategy into their portfolio could have limited their drawdown to just 8% and would currently be in the black today.
Better still, blending in contrarian value into a passive and growth portfolio did not sacrifice returns over the wonderful past decade for growth—it enhanced them.
Prepared for sunrise
The Orbis Global Balanced portfolio has changed over time, and will again as we continue to adapt to the ever-changing market environment. We are highly active investors, and we are happy to be different from our benchmark1 and peers2. It’s an approach that has served us well—since inception, the strategy has outperformed its benchmark, and is ranked in the top five among its peers3.
