Multi Asset Class Quarterly Report - Q4 2022

Equities

Global equity markets ended 2022 on a positive note as the MSCI All Country World Index returned 9.8% during the fourth quarter. Gains in global stocks can largely be ascribed to participants in equity markets anticipating a more subdued hawkish approach by central banks as we head into 2023. Global equities were also boosted following the news that Chinese authorities would relax certain lockdown conditions following a string of protests across the country.

Our quantitative model still prefers developed market equities outside of the USA, and this positioning served us well in the 4th quarter. The iShares® MSCI EAFE ETF, which gives investors exposure to a broad range of companies in Europe, Australia, Asia, and the Far East, rallied 17.6%. Our US equity ETF returned 4.78% over the same period.

Fixed Income

Despite the renewed ebullience within stock markets, bond yields edged higher during the quarter with the US and European 10-year benchmark yields closing the year at 3.88% (+8 bps) and 2.53% (+40 bps) respectively. The “risk-on” sentiment spilled over to the more volatile fixed income markets and the high yield corporate bonds and emerging market bonds in our models returned 4.4% and 8.4% respectively during the final 3 months of 2022.

The inflation-linked bonds on the portfolios are still riding the “inflation wave” and performed well with a 1.2% return for the quarter. The new ultra-short-term US Treasury exposure, which was introduced to the models in mid-November, returned 0.7%.

Private Equity

For the most part, our Private Equity instruments finished 2022 on a strong note. The iShares Listed Private Equity ETF returned 10.43%, HG Capital returned 11.09% and KKR returned 8.25%. Blackstone was the anomaly for the quarter, falling 10.50%. The reason for the fall in Blackstone was due to the redemption cap they placed on the Blackstone Real Estate Trust (BREIT). Despite this redemption, BREIT has a strong track record (13% annualised return since inception). Blackstone appears attractive at current prices. Investors can build a position in a best-in-class franchise and a quality growth company trading at 12x 2024 PE multiple.

Real Estate

2021 was the year of record numbers in Mergers & Acquisitions, fuelled by low-interest rates and
abundant liquidity. 2022 was the year of pricing the uncertainty, the uncertainty being the timing of the peak of the rate cycle, the quantum of available liquidity, and the stubbornness of inflation – all reflected in valuations with the Dow Jones Real Estate Index being down 27.7% in 2022. 2023 will be the year of recalibration with inflation and interest rates the key considerations as these companies determine debt pricing and availability in the real estate market.

We believe we’ll see companies focusing on organic growth until there is more certainty around yields, rents, operational costs, construction costs, and energy prices. In the MAS Moderate portfolio we have exposure to data and infrastructure real estate assets (+1.4% in Q4), where we believe this sub-sector will be the main benefactor of capital flows in 2023 (alongside healthcare/life sciences real-estate exposure) as the digital storage and tower space supply has to keep up with the increasing demand as the adoption rate of cloud storage and 5G roll-outs continue. The ETF we hold for this exposure has a dividend yield of 4.11% and its Price to Funds From Operations is currently at 9.60.

Infrastructure

Generally, our infrastructure holdings performed well with our larger exposures to our ETF holdings, Global Infrastructure and Global Water returned 7.57% and 14.63% respectively. Williams Companies and Engie were most pleasing and continued their positive returns with respective gains of 16.40% and 23.16%. Our most recent portfolio optimisation indicated a slight increase to infrastructure within the Cautious Portfolio. This increase in weight percentage was allocated towards the existing exposure we have within the Global Infrastructure ETF.

The Moderate Portfolio, as well as our Growth Portfolio, indicated no change to our exposure towards Infrastructure. However, we did implement a few minor changes within the infrastructure holdings of both the Moderate and Growth Portfolios. United Utilities was sold in favour of adding Cheniere Energy. We believe that a greater exposure to direct energy infrastructure will bode well for future returns. Due to regulatory changes that would’ve impacted the feasibility of holding this counter, Brookfield Infrastructure Partners was also sold out and the proceeds moved directly towards the Global Infrastructure ETF in both the Moderate and Growth portfolios.

Commodities

When using the S&P GSCI (Standard and Poor’s Goldman Sachs Commodity Index) as a measure,
commodities as an asset class has – for the second year running – outperformed all other major asset classes – equities, bonds and property. It is no surprise that energy was the standout for the year, and perhaps not for the reason most think. Yes, the Russia/Ukraine conflict played a role but one can argue, justifiably, that a secular phenomenon is also at play. Hydrocarbons have been responsible for the eradication of poverty in many parts of the world, but we live in an age where western democracies are manifestly obsessed with climate change. Some commentators have called this illusory prophesying. Nevertheless, this presents an opportunity.

Constraints on supply of a commodity will drive the price of said commodity up, and if lawmakers continue to follow the whim of a moment, this will not change. Producers of hydrocarbons will keep feeling the pinch but ironically, shareholders/investors should continue benefiting from share buybacks and dividends. In addition to this, China is turning, labour-dominated governments need to spend on infrastructure to stimulate their respective economies, interest rates appear to be approaching a period of slower hikes and subsequent stabilisation, and the US dollar is starting to weaken. This is bullish for commodities.

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