As with every year it is important that we hold ourselves to account and review our published views. As we approach the end of 2024 it is time to reflect on the year that has been (in January 2025 we will publish our views and outlook for the year ahead).
HWP has been in existence for over a decade and our mandate is to “keep wealthy people wealthy”. The discipline of reviewing our investment decisions and holding ourselves to account is important.
In January 2024 we published our Investor Insight 129, The Year Ahead, and our theme for the year was “you will be pleased you did not sit in Term Deposits”.
We entered 2024 underweight Australian Equities and neutral most other risk-based assets, except Diversified Credit and Infrastructure where we had small Overweight positions. As we end 2024, we are neutral Australian and Emerging Market Equities and Overweight Developed Markets (mainly US), Diversified Credit and Infrastructure whilst we continue with an Underweight to Secure Debt and Cash, as depicted below.
Tactical Asset Allocation – Quarter 4 2024
The level of global GDP growth has surprised markets. We expect global GDP to finish the year around 3.2 per cent, with US growth a solid 2.7 per cent versus an estimate at the beginning of the year of 1.5 per cent.
Looking forward we see the following possible macroeconomic scenarios, with the respective probability noted below.
Source: Hamilton Wealth Partners, Zenith Investment Partners
Fixed Income
We commenced the year with a small Overweight position, having introduced duration to our portfolios for the first time in many years.
We pointed out that we did envisage a trough in yields during the year however, and we removed our duration position in March.
We expected central banks to start cutting interest rates during the year but for Australia to be late to the party as inflation proved harder to fall into the RBA’s target band. This was correct but the rate cuts commenced a bit later in the US (September) than we had first thought due to persistent strong economic data there, and in Australia we will head into 2025 still waiting for the economic data to justify the first rate cut here.
We end the year with an Underweight position to Fixed Income as a result, but our portfolios continue to enjoy the attractive returns on offer through our short-term debt funds.
Equities
We entered the year Neutral Developed Market Equities with an Overweight in mid-caps, Underweight in US large caps and a bias towards going Overweight offshore equities early in 2024, which we did, whilst remaining Underweight Australian Equities.
In Emerging Market Equities (“EM”) we entered the year with a Neutral stance to strategic benchmarks but again pointed out that our bias was to move Overweight early on in 2024 which again we did.
Our view on equity markets was predicated on the stance that equity markets look ahead and are driven by interest rates. Markets can stomach a weak economic reality so long as they can see the ‘light at the end of the tunnel’, with this light being lower interest rates.
Being Overweight global equities has proved to be the right call for 2024, with the US market being the standout performer, the S&P 500 having risen over 25 per cent.
Whilst there will be volatility, we think there is room for US equities to continue to perform into 2025, as the “business friendly” policies of President Trump are announced and as further rate cuts occur, albeit we think the market is right to dial back their expectations on the size of these cuts.
We end the year with a small underweight to Australian equities, neutral to Emerging Markets and Overweight Developed Market Equities.
Property
We entered the year Neutral towards Property, but the reality was we were underweight in most client portfolios and remained so, as we saw little opportunity in this asset class.
A Neutral position in Property has been the correct call, notwithstanding some single asset industrial property opportunities during the year. We remain Neutral Property as we approach the end of the year but expect to see more opportunities in this asset class in 2025. We are seeing the gap between buyers and sellers start to narrow in favour of the buyers and transactions starting to pick up as 2024 comes to a close.
Alternative Assets
Over the decade we have slowly increased our positions across the sub-asset classes of Diversified Credit, Private Equity and Infrastructure.
We see these asset classes as crucial to portfolio returns and risk management.
We do however remain concerned with the proliferation of offerings in both Diversified Credit and Private Equity around the theme of “Democratisation of Private Assets”, which we think is a ridiculous term.
The disparity in quality concerns us. Knowing what you invest in, having full transparency around this and being rewarded for the risk you are being exposed to is crucial.
We do however believe that opportunities will present themselves in Property and Private Equity in 2025.
We are pleased not only with the performance and Overweight position we hold in Diversified Credit, but also with the diversity of our portfolio construction in this asset class.
Investors will hear more from us in 2025 as we do further work on portfolio construction in Real Estate, Infrastructure and Private Equity. We see further opportunity in these asset classes as a result of highly diversified global solutions becoming available in Australia, that we have not seen previously.
Infrastructure has delivered superior returns in 2024 and whilst we remain positive, we have tempered expectations during reviews as to what to expect in 2025.
Whilst we have attempted to maximise Alternative Asset strategies in client portfolios since 2018, liquidity must be considered as it is an issue for some of these strategies.
That said, providing a weighting that is suitably conservative and in line with a client’s risk profile, we continue to be of the view that they will provide attractive returns with reduced volatility and low correlation to traditional markets.
Wealth managers are now falling in love with the trend of private assets. We repeat our long-held view that these assets have reduced volatility and enhanced returns, but it is important that allocations to this asset class are correctly weighted and that there is full transparency of the underlying exposures and accurate knowledge of the risks.
Just as hedge funds proved to be illiquid, detrimental to portfolios and capital destroying 15 years ago, it will be interesting to see if the lower quality private assets provide similar issues in the next few years.
Summary
2024 has been a strong year for returns and we are pleased not only with our asset allocation and tactical moves through the year but also with our fund manager selection.
As we close out 2024, we are Overweight risk-based assets, led through an Overweight in Developed Market Equities and Diversified Credit.
We reduced our bond/fixed income exposure through the year and in hindsight having duration in portfolios at the beginning of 2024 did not hinder portfolio performance but neither did it add to it. The risk/reward equation favoured a conservative diversified credit exposure and being duration neutral as opposed to the volatility of bonds.
As we have mentioned in these pages previously, we must be careful not to become anchored to the environment we are in, or how the latest markets and performance affect us.
When we are in a bear market, it can feel like it will last forever; similarly, a market that is booming such as we have experienced over the last 14 months.
We believe that Risk will continue to be rewarded medium term over Defensive, but through a conservative lens, as we believe our mandate is to keep wealthy people wealthy.
Successful investors never forget risk as a key component of strategy and the need for prudent risk management. Looking towards 2025, we are attempting to expose portfolios to risk exposure upside through equities and alternative assets whilst balancing risk in portfolio construction.
At HWP, we will continue to always position client portfolios for a full market cycle, not being distracted by short term noise. Underlying asset valuations and credit quality are important to consider. Asset allocation is the most crucial decision an investor can make, and investors who are bold when markets are out of line with valuations will achieve the best results.
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