This month’s chart demonstrates that a higher proportion of asset classes are posting negative returns this year than any year since 1901. Ruffer have not been immune to this.
2017 was a record year in that almost all asset classes rose. Investors of all stripes were rewarded. Many readers will know that the S&P 500 was up every single month of the year which was unprecedented. 2018 is exhibiting the same sort of uniformity on the way down.
At this time of year Mariah Carey’s ‘All I Want for Christmas is You’ is ubiquitous, a classic seasonal song about the desire to forego the gaudy baubles of gifts to spend more time with the one you love. As we approach the end of a difficult year, I suspect some investors may be tempted by an opposite trade: a Faustian pact to swap their dearly beloved for a positive return!
The first line of the song is ‘I don’t want a lot for Christmas, there is just one thing I need’, which may ring true to many investors today. What we are all seeking is a hiding place and most crucially something (anything!) that will go up.
Nine years into an equity bull market of epic proportions it is not surprising we are starting to experience indigestion. However, what should give investors heartburn over the festive period is that diversifying assets have failed and indeed have contributed to their losses. It is not an exaggeration to say there has been nowhere to hide. Only investors in US dollar cash have eked out small gains.
There is little debate asset prices have been helped in the last decade by a combination of low interest rates and quantitative easing. As we moved into the latter half of 2018 we are experiencing a reversal of these trends – interest rates are rising and global central banks are now shrinking their balance sheets by selling assets. Despite market wobbles the Fed seem determined to continue on their path of monetary tightening. The idea of a ‘Fed Put’ supporting the market is being seriously questioned for the first time in years. Former Fed Chair Janet Yellen once said unwinding QE would be ‘like watching paint dry’; thus far this sentiment appears both optimistic and inaccurate!
At Ruffer, we believe robust portfolios will need unconventional protections in the next crisis. These investments are designed to benefit from rising corporate borrowing costs and an increase in volatility. Essentially, both thrive on market dislocations. Both of these asset classes are priced lowly relative to history. Early indications are that these are likely to perform well in periods of significant stress. However, they are not a panacea, they cost money to own and in a benign market outcome will hold the portfolio back – this is why so many investors are afraid to hold them.
Traditional protections may fail when needed most; what investors have experienced this year. The reason for this is that many supposed safe haven assets are currently highly valued. Furthermore, as was shown in February and in this current sell off, the traditional correlations can not necessarily be relied upon. Rather than an anomaly, we believe 2018 is portentous of the environment going forward. If Mariah Carey was an absolute return fund manager she might sing, “All I want for Christmas is protection.” but I doubt that record would have sold as well.
Chart source: Deutsche Bank and Ruffer