Dear Reader and Fellow Investors,
Having worked in a private banking environment over the last few years, I have often got frustrated with the greater emphasis on asset allocation rather than security selection.
However, it seems that when macroeconomic conditions are in extreme conditions, asset allocation becomes justifiably important. This is similar to our arguments presented in a previous blog where we suggest asset allocation should become more important as risk assets reach valuations closer to the extremes of being over or under valued relative to “intrinsic value”.
The extreme macroeconomic environment we indicate refers primarily to the strong reduction in private credit growth experienced in developed countries since 2008. Its affect has been subtly dampened by huge government intervention. With recent political talk shifting from who can print the most money to who can cut their budget the fastest – this lack of public credit into the economic system will reveal the cracks of significant under investment, weak credit growth and reduced consumer spending from the private sector. Indeed, such a rapid shift in political sentiment will bring to the fore the systems natural tendency to deflate with the current incentives and conditions in place, which it has been yearning to do for several years now, but governments have done such an admiral job in trying to hold it back.
As a result, we are maintaining the principal concept of the asset allocation presented in this blog over the last few months, thereby holding our anxiety to buy more risk assets. Over the last few days we have increased the cash component further at the cost of reducing our senior high quality paper and sub investment grade bond exposure. A portion of such sales have been invested into equities. As a consequence our asset allocation has shifted slightly to:-