Market commentary: Jul 2023
Portfolio performance
The US Federal Reserve raised its rate by 0.25% to a new target range of 5.25% to 5.50%, and in New Zealand the OCR is 5.50%. There are signs that inflation is moderating but both central banks have indicated two further rate rises of 0.25% will be needed. The general view is interest rates will remain high for some time. Share markets have performed strongly over the year to date but it’s interesting to note that the gains in the US S&P 500 were largely propelled by its top 10 constituents – Apple Microsoft, Amazon etc, and the excitement around Artificial Intelligence (AI).
Investors fled share and bond markets in 2022 shifting to cash. As at 30 June 2023, US money market accounts held a record $5.43 Trillion. It’s understandable for people to feel uncomfortable with the uncertainty created by inflation, interest rates, war, and possible recession. But now, with share prices a lot higher, those that sold out may be regretting their decision. This is a great example of markets surprising with a rebound when circumstances are bleak. To steal a quote from Caroline Randell (portfolio manager at Capital Group) “The lesson for investors who don’t want to miss these opportunities? Be brave and stay invested in companies that can weather a potential storm”. The benefit of staying invested can be seen in our client portfolio returns for International and Australasian shares.
ESG – aligning investment objectives with values
We believe that considering Environmental, Social, and Governance (ESG) issues when deciding which companies to invest in is critical to successful long-term investing. All the managed funds in our client portfolios have ESG policy embedded in their investment decision process. This ranges from the exclusion of companies involved in such things as fossil fuels, tobacco, weapons manufacture, etc (a very basic approach) to sophisticated analysis that goes deeper and considers things like greenhouse gas emissions, employee turnover rates, commitment to diversity, and controversy.
A good example is the Capital Group New Perspective Fund, which invests in early-stage and established multinational companies and is part of our International Equity strategy. Their ESG philosophy is based on the belief “that considering material ESG issues as part of our research helps us understand long-term risks and opportunities for investors”.
This approach to investment decision-making is in line with our belief that to be a successful investor it is imperative to gain a deep understanding of companies by considering material ESG issues. It makes sense to us that companies with strong ESG attributes are more likely to achieve sustainable profits over the long term. The return on the fund for the last year was 16% and averaged 11% per year over the last 6 years.
Richard Grimes, CERTIFIED FINANCIAL PLANNER (CFPCM), Director and Financial Adviser