June 10, 2022
Yesterday I had the opportunity to attend the Ohio Institutional Investment Forum – a one day conference for large pension and endowment fund managers across the state. Speakers included the Chief Investment Officer for the Ohio State University endowment, the Executive Director of the Ohio School Employees Retirement System and senior investment personnel from major investment firms such as BlackRock, Fidelity, and Nationwide. It was a terrific chance to step back and gain perspective from how these major institutions are navigating the current market environment. I came away with a few pages of notes and I thought I would share a few key quotes from speakers and our takeaways.
Thoughts on The Prospect of Recession
Speaker quote: “We’ve done a lot of historical research and we believe the most statistically relevant predictor of a recession is a combination of the year over year change in the Conference Board Leading Economic Indicators, the employment gap (gap between unemployment and number of job seekers), and the spread between the 3-month T-bill and the 10-year Treasury note. Right now, this combination is NOT pointing to a recession being likely in the next 12 months.”
Our take: The topic of whether or not the U.S. economy is heading for a recession was a big discussion point during the forum. There was a diversity of opinions (with most saying no recession) but the quote above from a big institutional investment firm was in my opinion the best at providing facts. Even though inflation is a major challenge, the speaker believed healthy consumer balance sheets, a strong employment backdrop, and a banking system which is not overleveraged provides a long runway before a recession may happen.
Speaker quote: “A fork in the road is coming (meaning recession or no recession), but we believe it’s a long way off. Investors can wait and be patient for more information before making major allocation shifts.”
Our take: This second quote is an offshoot from the first. The thought is with data not yet pointing to recession, investors can take their time and be more “neutral” with their asset allocations while they wait for data which may provide more clarity.
Thoughts on Gold
Speaker quote: “Inflation and geopolitical risk will likely sustain demand for gold as a hedge.”
Our take: Certain objective-based portfolio strategies we have the privilege of managing for clients contain an allocation to gold in the current environment. It was interesting to hear speakers discuss the potential benefits of gold within institutional portfolios. Speakers also presented research which showed gold historically being one of the best performing asset classes in stagflationary (slowing growth, higher inflation) environments.
Thoughts on Asset Allocation
Speaker quote: “We like commodities and are maintaining a position in portfolios, but are trimming exposure after the recent price runs.”
Our take: I asked a follow up question from this senior research professional from a large asset management firm about the size of their commodity position and he quantified that trimming involved taking the position from “3% to 2% of a balanced portfolio.” Commodities were a hot topic at the forum with many large institutions just starting to add commodities to their allocations. Certain objective-based portfolio strategies TJG manages contain a real asset sleeve where commodities are targeted at 4-5% of the overall portfolio. I was struck by the notion that even though commodities were being discussed by a number of institutional funds, The Joseph Group has a larger allocation to commodities than most of these institutions. That said, I generally agree with the idea of taking profits and trimming overweight positions into strength.
Speaker quote: “Energy is trading with a big geopolitical risk premium. When we get clarity, that risk premium will go away and prices will likely drop.”
Our take: Energy is a current performance leader, but I thought this quote was a good reminder about managing risk and not assuming recent price gains will continue far into the future.
Speaker quote: “We have tilts to foreign stocks, dividend paying companies, and small cap stocks.”
Our take: All three of these areas make sense to us. Dividends are likely to take a larger role in total returns in an environment where expanding P/E multiples will be challenged. Also, both foreign stocks and small cap stocks are trading at “cheap” levels relative to their historical averages.
Speaker quote: “Don’t buy stocks just because they are cheap, own companies which are in sync with what is happening in the world. After all, we don’t need buggy whips anymore.”
Our take: This quote is a great cautionary reminder about value traps and making sure companies have a real fundamental purpose and are not just cheap for a reason. The forum had a session dedicated to “growth stocks vs. value stocks” with the thought that after years of growth stock outperformance, leadership is due to shift toward value. In general, we agree, but our own definition of value contains a tilt toward dividends where there are tangible cash flows supporting the business.
Thoughts on Inflation
Speaker quote: “We believe inflation slows later in 2022.”
Our take: As I type, a headline just came out that the May Consumer Price Index came out with a rise of +8.6%, the highest inflation rate since 1981. Inflation was a hot topic at the forum with virtually all participants believing inflation numbers would fall over the next 6-9 months as China reopens and continued supply pressures ease. The general consensus at the forum is we are living through “peak inflation” right now and market volatility spurred by inflation headlines represents opportunity for long-term investors.
The institutional investors in the room at the forum represented multi-billion-dollar endowment and pension portfolios with long time horizons. Overall, the investors in charge of these portfolios seemed to have a theme of “back to basics” – tuning out the noise and focusing on investing fundamentals. There was an acknowledgement the post-COVID environment may have created a lot of hype around technology stocks but going forward, basic concepts such as valuation (buying what is cheap), cash flows/dividends, and using volatility as an opportunity to rebalance should lead to long-term investing success.
Written by Travis Upton, Partner, CEO and Chief Investment Officer