A reporter once asked a professional basketball player during a post-game interview how tall he was. Hearing the answer of 6’6”, the reporter said, “Wow, that’s tall!” At this the player astutely responded, “It’s all relative.” That is an interesting perspective. In that moment, standing next to the reporter, he was a giant, but in the NBA, 6’6” makes you one of the “little” guys.
Often we as portfolio managers and advisors need a little perspective as we are constantly evaluating opportunities and investing for our portfolios. It is sometimes easy to lose sight of the long-term objectives as short-term external stimulus impacts our daily investing lives. As a globally diversified conservative asset manager, we are always looking to identify long term themes and opportunities that will benefit the portfolio as well as hedges to protect the portfolio creating diversification.
Portfolio managers and asset allocators alike are taught that diversification is the key to long-term success. That holds true when the investments that make up the portfolio are not highly correlated – meaning that the different investments don’t all move in the same direction. Over time, shifts in portfolios have included allocations to international investments and in more recent years to hedged or “alternative” strategies as parts of client’s portfolio. Over time we have seen the advantages of diversification—more consistent returns with less volatility. However, in any given short-term period (and certainly during periods of global volatility and uncertainty such as we are currently experiencing) the benefits of diversification may become elusive. To be dorky about it—the correlation of the asset classes, mathematically speaking, may move to 1.0. The non-dorky translation—diversification may provide little short-term benefit and quite often may act as a drag, hurting portfolio performance.
Marketfield, one of our global, hedged asset managers, is a great example. For most of 2014, Marketfield has significantly underperformed its global index. In fact, a portfolio made up of solely US large company stocks and of high quality US bonds has significantly outperformed almost all globally invested portfolios. We believe this was a function of a strengthening US economy being held back by the consequences of ineffective stimulus measures coming out of Europe and Japan. As a result, the US is feeling the deflationary pressures from abroad, which consequently allows the Fed to continue its low interest rate policy. We clearly saw the negative impact of these forces on Marketfield’s strategy.
As a result, we reduced our exposure to Marketfield across our model portfolios. You may be asking why we don’t just eliminate this manager entirely from the portfolio. The answer is simple: it is about maintaining your perspective. These are smart guys running complex global strategies with themes that we believe will play a major role in long-term performance. They consider such themes as wage inflation in an accelerating US economy, China’s efforts to bolster its economy, domestic demand for equities in Japan, and the benign mandate of Brazil’s re-elected president. While we expect the majority of their themes to work out over time, we don’t know when that will happen. At the same time, we are adding back to broad US exposure after several of our positions hit stop losses during the sharp downturn in early October. We continue to monitor US labor and manufacturing data (which continues to show signs of improvement) and doing our best to keep our perspective concerning the opportunities that lie in the volatile international markets. As always, feel free to call, email, or now reach out to us on our blog (in the “Notes” section of our redesigned website—www.stonebridge-am.com) with any questions or concerns.