Investment Perspectives 4Q Jan 2012
Many investors found that 2011 was both more volatile and less rewarding than past years, as shown in the table below. However, the US market easily surpassed other areas of the world
Each quarter we explore a topic that we believe is relevant for our clients in understanding the current investment environment and the markets.
My talk today has two parts: general and specific. The general deals with my outlook for investing overall in today’s most uncertain world. It will be, in my judgment, a world of low absolute returns, for a period of possibly a few years. The specific part of my talk refers to the desire for achieving tax efficiency in today’s investment climate.
The $1 trillion U.S. Federal Budget deficit has attracted both national and global attention. If the deficit’s projected growth continues unchecked, we risk severe consequences, including higher interest rates and a prolonged period of anemic economic growth.
Today’s investors must recognize two key developments: first, the growing economic extremes between the world’s wealthiest people and the poorest (particularly in the U.S.); second, the differing prospects of the middle class in the emerging versus developed world. This paper examines the investment implications of these contrasting profiles and discusses some of the opportunities and risks that they represent.
We view 2011 as a year of continued positive growth economically but also as a year of increasing geopolitical volatility. These conditions support our view that an intelligently diversified portfolio with the flexibility to capitalize on meaningful opportunities is the appropriate approach for our clients.
In 2006 Aureus wrote to clients explaining why private equity and venture capital were asset classes to be avoided. While many factors contributed to our view, fundamentally we felt excessive asset flows combined with a weak exit environment combined to create a poor return dynamic. Today, we believe venture capital in particular is an attractive asset class for clients with the appropriate profile.
Europe’s sovereign debt/banking crisis will not be finally resolved until the politicians decide that it’s better to face the consequences of a true solution, than to continue to postpone. To date, all that has happened is delaying the day of reckoning, through granting loans of enormous size to countries which have no realistic hope of ever repaying.
From Argentina to India to China, consumer price indices (CPI) outside the US are rising rapidly. Other parts of the developed world, including the US, still report nearly flat consumer prices. Low interest rates globally and mixed growth prospects make inflation a particularly important variable for different asset classes and specific companies.
Given the recent volatility in fixed income markets and negative media coverage, Aureus felt it important to offer the following commentary. While fixed income returns remain slightly positive for the year, bonds have lost most of the gains achieved from May through September. Fear of inflation and concerns over deficits, at the federal and municipal level, have exacerbated the situation.
The Aureus base case asset allocation model for 2010 presents what we believe to be an optimal asset mix for our clients over the next two to three years. Given present uncertainties in today’s world economies and markets, we realize that making any long-term prediction is more than usually difficult.