Inflation and our real return targets
The benchmarks for W1M's MPS and bespoke portfolios are ‘CPI +', meaning that over the varying investment horizons, we aim to provide a real return - a return in excess of inflation. Some investments use an index such as MSCI ACWI, or a combination of indices weighted together, for example to create a hypothetical 60:40 equity:bond portfolio. We keep track of our performance on three fronts: against the market, against our peers and against inflation - it is from the latter that we calculate our benchmark.
There are a number of reasons why we feel that a ‘CPI+' benchmark is the best option. For example, it is consistent with our investment philosophy - maintaining purchasing power, it demonstrates accountability and transparency. Furthermore, it is widely referred to, comparatively easy to understand, and also fits with adviser's cash flow modelling. The chart below shows the corrosive power of inflation on the real value of an investment. It is this that we seek to prevent.
Source: Bloomberg
2022 has provided major hurdles for all investments - not only have asset prices been falling, but inflation has been so elevated that it has proved a very tough comparison. Very few assets, let alone asset classes, have been able to provide a real return in the year to date. Consequently, many of our mandates have lost ground against their benchmark. However, we are not inclined to change them. Aside from anything else, we feel that, by and large, the aim of investing is to grow one's wealth, and in practical terms that means that you ought to be able to afford more with the assets - a real return.
The current bout of inflation comes at the end of a period of very low interest rates and lax monetary policy, this was then disrupted by the massive fiscal and monetary policy responses to the pandemic and further disruptions arrived from the Russian invasion of Ukraine, while the world was still struggling with its post-pandemic supply chains. Although inflation is running high, there are various market indicators that suggest there is confidence that central banks will manage to get it back down to around their targets in relatively short order. For most advanced economy central banks this means inflation around 2%.
Given this, and the fact that we feel that the fall in markets have presented some attractive investment opportunities, particularly ones that are more suitable for active, direct, multi-asset investors such as W1M, we are still confident that, through the cycle, we are able to meet our CPI + benchmarks.
