Our multi-asset strategies captured the recovery through the first half of 2023 well and delivered solid risk adjusted returns. Our new fund, EDGE Sustainable Growth, thus finished the quarter solidly within the top 10% of its Bloomberg peer group. Across mandates and funds, we benefited from large holdings in the US equity market. Furthermore, both in our multi asset strategies and in our global fixed income strategies we held large positions in high yield bonds which, again, delivered solid returns with less volatility than high grade bonds. We thereby avoided the worst volatility in the fixed income market and the underperformance in small cap and emerging market equities, in particular Chinese equities where we maintain a zero allocation.
According to Biden, Xi is best characterised as a dictator. To us it is clear that Xi’s behaviour is moving closer to previous patterns of Mao, Lenin, Stalin and Putin and, at the same time, that the Chinese recovery is failing to gain momentum and we are thus seeing an increase in China-related risks. The Fed and its followers at the ECB, BoE and SNB keep trying to regain their lost credibility, even in the face of receding inflation and a contracting global manufacturing sector. This has taken its toll on global growth, putting Europe on the edge of recession and increasing the risk of another round of financial stress.
Figure 1: Equity index returns show the diverging fortunes of China, ESG and US Tech
Markets have now priced in at least one more rate hike from the Fed, which brings down the risk of an immediate shock. Still, the recent US “stress tests” revealed a USD 100bln hole in the balance sheet of Bank of America and increasing yields it has cost the vulnerable Bundesbank enough unrealised losses that the independent auditor this month stated that a capital injection could be needed. The German government has a different opinion, and we side with them in this case. We also trust that BofA has the situation under control and that the Swiss authorities selling Credit Suisse for scrap to UBS and backdating the laws will not set a precedent. Still, we all know that stress can take time to re-surface as it did in 2007-08. We thus found that the risk-return trade off in equities had deteriorated and decided in late June to reduce equity positions from maximum to more neutral levels. In the most growth-oriented of our mandates this entails maintaining positions in Nasdaq 100 while reducing overall equity weights by 40 percentage points, down to 60%. In more cautious strategies we have also reduced equity weights but maintain high yield positions.
The Nasdaq index has had its best start to the year in several decades with Nasdaq 100 delivering a return of almost 40% in the first 6 months of the year. In this context it is worth remembering that Nasdaq 100 has barely outperformed the S&P 500 since 2000 (see Figure 1). We look at the short-term risk and the long-term potential of investing in more detail on the following pages. For now, we are positioned as follows:
In our growth strategies, with up to 100% equities, we hold equity allocations close to neutral levels around 60%. In EDGE Sustainable Growth, these positions remain concentrated in the low pollution, high growth sectors, such as IT and Healthcare.
In our balanced multi-asset strategies, we hold equity allocations close to average levels which, in most cases, means we have reduced our allocation from 50% to around 30%. We are maintaining significant holdings of high yield bonds in these strategies.
Across our Global Fixed Income Opportunities portfolios, we have reduced risk by allocating from high yield bonds to high grade bonds. We are maintaining a preference for short duration.
Mads N. S. Pedersen
Managing Partner and CIO