We recently toured Asia on a trip with AIMA (the Alternative Investment Management Association), which served not only to teach us much and open our minds, but validated our points of view on many things.
With respect to commodities and general investment, we have always believed that the time horizon for Asia (particularly China) isn`t the same as the North American investment timeframe of 3, 5 or 7 years. It is more like 33, 35 or 37 years, and this is exactly what we saw and heard from people on the ground throughout Asia including officials from the Hong Kong Exchange. This sentiment was summed up brilliantly some time ago by the CEO of CPP, one of the largest and most respected investors in the region, who said: 'we don`t think in terms of quarters, but quarter centuries'.
In response to their own significant investment in the region, one senior official highlighted they 'like to focus on the demand side of the equation long term'. We agree. The current state of commodities is oversupply, which is more favourable than a lack of demand because supply can adapt more quickly to falling price - and it has.
Based on our time in Asia, noting there are 300 to 500 million middle-class investors, we believe that the question is not whether demand is there or not, it is what impact this demand will have on the price of commodities and general investment in future. Keep your mind open.
"Buy when there is blood in the streets" - Nov 2015
You may wonder why we've summoned up that old Baron Rothschild quote now - after all, several equity markets have seen jaw-dropping gains in October and the market pressures in August and September are increasingly looking to be a distant and unpleasant memory.
It is because some of the market's greatest diversifiers and effective inflation hedges have been bloodied. And it may be time to rediscover the beneficial, long-term impacts that they can have on a portfolio.
Adding commodity-tilted exposure at this stage may sound like a risky proposition, but over the long run, the opposite has been more accurate. As a general asset category, it offers several portfolio benefits worth remembering - its low correlation to financial assets, its inherent inflation-fighting properties and its protective capabilities against global event risk.
We are not making a 'call' on commodities (though we are bullish on their long-term prospects). Rather, we believe that commodities should form a permanent, strategic portfolio allocation. And while tactical considerations are important (timing, weighting, etc.) that role is best played by managers possessing specific investment expertise.
To learn more about the role that commodity exposure can play in successful portfolios, we invite you to read our recent research piece entitled "Are commodities still a valid inflation hedge in this low price environment?" by clicking on the image below.
A Rising Tide - Oct 2015
Last month, we had suggested that the market winds were beginning to strengthen and that we were poised to take advantage of them if they became more sustained, regardless of their direction.
That shift did begin to occur, enabling us to deliver a modest, positive gain in a month that was sharply negative for many asset classes (including equities) and capitalize on several short-term, negative market movements (see charts).
This uneasy market juncture provides a superb opportunity to assess the fitness of the managers that you have added to your crew. It is easy to lay claim to genius when tailwinds are blowing (as it has in the last several years), but does the same hold true during market turbulence? Did the managers you chose deliver the diversification benefits that you were expecting, or did their performance echo that of the broader market? How did they perform in 2014? Or in 2008?
Carl Icahn, David Stockman, James Grant and scores of others are expressing growing concerns about developing headwinds. If they are right, be sure that you have a crew with proven experience winning in those environments.
After all, a rising tide floats all boats, but are you prepared if the tide goes out?
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