BL Global Flexible EUR's investment strategy is based on a flexible long term allocation, with capital allocation over four major asset classes that tend to have a negative correlation: Equities/Bonds/Gold/Cash.
However, the strategy is not based on market timing or short term decisions.
Performance in line with portfolio profile
After a difficult start to 2021 in a context of sector rotation in favour of more cyclical and value segments of the market, traditionally under-represented in the portfolio, the Fund managed to regain ground to finish the year up +11% versus a 9% return for the comparable Lipper peer group (Lipper Global Mixed Asset EUR Balanced).
| 2021 | 2020 | 2019 | 2018 | 2017 | |
|---|---|---|---|---|---|
| Performance | +11% | +1,9% | +22,5% | -4,9% | +8,2% |
* Note: Performance net of fees calculated as at 31.12 of each year. Past performance is not a guide to future returns. Source: Lipper.
| 6 months | 1 year | 3 years | 5 years | 10 years | |
|---|---|---|---|---|---|
| Performance | 3,1% | 11% | 38,6% | 42,6% | 74,9% |
| Volatility | 7,8% | 8,3% | 9,6% | 8,9% | 8,4% |
* Note: Cumulative performance net of fees and annualised volatility (B share) calculated as at 31.12.2021. Past performance is not a guide to future returns. Source: Lipper.
Overall, the Fund benefited from its dynamic equity allocation, well above 50%. Country allocation had a mixed impact, with underweight exposure to the US market, the best performing market over the period, and overweight exposure to Japanese stocks weighing on performance, while significant exposure to European equities contributed positively. In addition, currency allocation detracted from performance as currency risk was partially hedged against the strengthening US dollar.
The fixed income segment had little impact on annual performance in a context of rising US interest rates, while in the second half of the year the stabilisation of the price of gold allowed some gold-related stocks to rise.
Excluding gold-related stocks, the main individual positive contributions came mainly from developed countries, with stocks in the Healthcare (Roche, GlaxoSmithKline, Novo Nordisk, Gilead Sciences), Technology and Communication Services (Accenture, Microsoft, Alphabet), Real Estate (CK Asset holdings) and Consumer Staples (Nestlé) sectors.
On the negative side, Japanese (Kao, Asahi Intecc, Pigeon, Nintendo, Secom) and Asian (Alibaba, LG Household & Healthcare, Travelsky Technology) stocks were the main detractors.
Positioning: Equities as the primary source of return
Equities (72.9% as at 31/12/2021)
The net allocation to equities (excluding gold mining) was actively managed during this year, by movements of securities according to valuation opportunities, without adding hedges on market indices.
In the current environment of low bond and money market yields and rising inflation, the Fund Manager maintains an allocation oriented primarily towards equities (between 40 and 90%), which remain the prime investment for yield generation. In view of the risks inherent to this high position in a context of monetary tightening and tense valuations, it is still prudent to manage equities actively and select quality companies.
Bonds (3.95% as of 31/12/2021)
As risk is taken through equities, bonds play a diversification and protection role in the portfolio. Thus, our fixed income exposure is defensive (currently invested in long-term US Treasuries) and does not directly aim to generate returns.
In the context of a gradual rise in rates, allocation was reduced during the second half of the year (from 8.4% at the end of June to 3.95% at the end of December 2021).
Precious Metals (12.46% as of 31/12/2021)
Gold continues to play an important role in portfolio construction as a reliable investment during times of monetary and financial turmoil and as a hedge against inflation risk.
We gain leverage, relative to the gold price, by investing in gold-related companies and give priority to Royalty Companies, which benefit from a more robust business model and better visibility on cashflows.
Our contrarian approach is to increase/decrease exposure during a period of falling/rising gold prices.
The gold allocation therefore remains within the present range at 10-15% in view of the possible new upward trend on gold in a context of real interest rates remaining low.
Cash & Cash Equivalents (10.72% as at 31/12/2021)
Cash remained significant in the portfolio. After their record level of 32% at the end of December 2019, they were used for tactical equity purchases and ended up at the level of 10.72% at the end of December 2021.
Outlook
If economic growth remains buoyant, signs of a slowdown could materialise during the year.
Inflation and the monetary policy response to inflation are key to watch over the coming months. The problem is that it is simply impossible to predict how things will change at this level.
In this context, Guy Wagner takes on the following convictions:
- For an investor who wants to protect/increase his purchasing power over time and has a sufficiently long investment horizon, the real assets are clearly to be preferred;
- In the current environment, increased volatility is the price to pay for purchasing power protection;
- For several years, equity markets have benefited from a particularly favourable environment with very low interest rates and high corporate earnings. It would be surprising that this environment remains as favourable in 2022;
- Equity market valuations are stretched in absolute terms but not relative terms;;
- Given the close relationship between the absolute level of valuation multiples and long-term returns, we can conclude that at particularly high multiples, we need to anticipate a downward revision of future returns. This is particularly true for investors passively buying major stock market indices;
- It is becoming increasingly difficult to reconcile a stock index outperformance objective with that of capital protection; this incompatibility will become particularly flagrant in the event of a market correction given the significant concentration of these indices around a few large caps;
- The premium for quality stocks generating long term value is particularly high.
From this last observation, we could conclude that it would be relevant to switch out of quality growth stocks into the more cyclical and value segments of the market, especially as in a context of rising interest rates and great optimism about the global economy, it is highly possible that this rotation can last. The problem with lower quality stocks is that to make money with them, it usually requires a very good timing: buy at the right time AND sell at the right time. Such an approach, however, is completely incompatible with our long-term investment philosophy of considering a share purchase as a long-term holding in a company.
Equities are not a homogenous asset class. Our favoured approach is to reduce the weight of these high-growth stocks in the portfolio (but not completely out of the portfolio) in favour of other quality stocks that have performed less well or have already corrected meaningfully.
In the BL Global Flexible EUR portfolio, therefore, the equity allocation (72.9% at the end of December) should remain the main long-term contributor to portfolio performance. It consists of quality stocks, complementary profiles combined according to the market context (secular growth, attractive valuation, defensive character). In addition, we maintain our positions in cash, long-dated sovereign bonds and gold-related companies to protect the portfolio during more difficult times for equities.
Fixed income investments are becoming increasingly unattractive and therefore cannot be seen as a means of generating returns. In the context of a multi asset, flexible allocation fund, the Fund Manager tends to think that it may be appropriate to consider equity investments in defensive sectors offering attractive dividends (growing and sustainable dividends) as an alternative to government bonds.
This strategy, however, implies an increase in volatility, of which one must be aware.