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2023 was a year of twists and turns although it ended up being a good one for our portfolios with solid absolute returns and, critically, portfolios are now above their previous high-water marks. There were good contributions from listed equities, private and liquid credit and smaller positive contributions from absolute return. Private equity was broadly flat in aggregate with opportunistic and real estate strategies offsetting losses in early-stage venture capital investments. We believe we are now in a new regime with higher interest rates than before the pandemic, with the era of low/zero/negative rates over. This adjustment means good risk reward is available in areas of secured lending and opportunistic credit strategies. Dispersion is also higher, leading to more relative value opportunities for active management. Pricing readjustment in the private equity sector is leading to better risk-adjusted opportunities across all areas, with secondaries a current sweet spot.

By now most of those reading this letter will know that 2022 was the worst year for most asset classes since 2008 so we will not cover it in too much detail. It was, remarkably, only the seventh year since 1871 that both stocks and (the usual safe haven of) government bonds were down in unison. Looking across asset class returns shows there was limited opportunity for investors to generate positive returns outside of energy related investments. Most stock and bond markets were negative, but some alternative investment strategies held up better such as macro hedge funds, highlighting that in practice it was very difficult to achieve diversification for most global investors. Why was this the case?

After another tumultuous and volatile year, we think a good way to start this letter is to remind readers of our approach to investing, namely: We manage portfolios for the long term whilst protecting against a permanent loss of capital; time in the market rather than timing the market leads to the strongest long-term returns; only paying fees to those best-in-class managers and strategies where we believe there is a strong opportunity to generate outperformance net of fees against a suitable, low-cost, investable benchmark; biasing our portfolio to less liquid strategies in order to capture high and differentiating return drivers.

The first half of 2021 has felt somewhat calmer than 2020 despite a UK lockdown from January to April, and the recent emergence of the highly contagious Delta variant. As stated in our January letter, we had a broadly positive thesis based primarily on a successful vaccine roll-out across developed economies and continued expected low cost of capital. However, we noted that asset valuations were high and there were bubble-like conditions in some private market segments. We also did not materially change positioning entering 2021 given our longer-term thematic investing approach. Not much has changed in our views or positioning over the last six months, so our note this time will be more succinct than prior versions. As usual, we will cover performance, provide an updated view on key macro thoughts, before completing the letter with a summary of our portfolio positioning. We also touch on two areas of particular interest – inflation (and how to hedge against it), and tail risk protection (essentially portfolio insurance).

Our 2021 annual outlook summarises our views and insights on the key questions impacting our portfolios today. 2020 was a year that will be with us for the rest of our lives (as it surely will be for everyone reading this letter). We are truly grateful that we came through the experience as a stronger organisation and that we were fortunate to have several new families decide to work with us despite the turmoil and uncertainty. When we reviewed our own performance, we realised that leaning on our “golden rules” of investing really came to our aid in the more difficult moments of 2020, allowing us to keep cool, be rational and play offence where possible. These rules were: 1) You cannot time the market 2) Markets always overshoot both to the up and downside and regularly “disconnect” from fundamentals 3) When correlations go to one, there is really limited portfolio diversification available to investors. Everyone knows the above, but few investors are really prepared to deal with the environment when it happens. We also took away two other key points which are more a function of the environment post the last crisis of 2008, namely: 4) Never underestimate the willingness of governments in the modern age to support their economies and ultimately their population (i.e. voters) 5) Relying on traditional valuation metrics is not as meaningful as in the past when today’s “risk-free” rate is zero and is expected to remain very low for the foreseeable future. Our performance was strong in 2020 with portfolios experiencing gains in the high single to low double-digit territory. Active manager outperformance in Technology and Healthcare equities was a key driver, supported by modest positive returns in our uncorrelated strategies and credit allocations, as well as our gold position.

The first half of 2020 has been the most volatile period in financial markets for a decade and writing about it could fill many pages. The global economy suffered a virtual cardiac arrest in March and April as most major economies implemented country-wide “lock-downs” to stem the spread of the Covid-19 virus. These measures led to zero (or near zero) revenues for large segments of the economy such as travel, leisure, restaurants etc., and a corresponding huge spike in unemployment. In the US alone, around 30 million people (c.20% of all workers) filed for unemployment benefit which was more than double the peak of the 2008/09 recession and equivalent to the removal of all new jobs created since the last crisis.

Our 2020 annual outlook summarises our views and insights on the key questions impacting our portfolios today. As a reminder, our approach is not to make short-term decisions in markets that are volatile and unpredictable. We do, however, invest probabilistically, and this approach forms the basis of our longer-term strategy which is discussed in this document. In the medium-term interest rates will remain near record lows given the absence of inflationary pressures and low global growth. The Federal Reserve’s decision to reverse course and cut interest rates from 2.25% to 1.5%, a resumption of Fed QE via Repo Operations, and on-going negative interest rate policy in Europe and Japan, have depressed bond yields and stabilised financial markets. This has helped insulate economies from external shocks such as trade tensions between the US and China, Brexit, etc. We see little incentive for central banks to change course. In the near-term, recession risk has reduced mainly due to the monetary stimulus mentioned above. The US consumer, responsible for two-thirds of US GDP, remains in good health with record low unemployment and carrying less leverage than in the recent past.

As most readers know, our approach to investment is very much long term in nature. We felt, however, that an update was warranted given recent changes in the macro-economic environment and the resulting alterations we are making to client portfolios. Back in January we highlighted a challenging outlook for traditional asset classes. Our longer term expected returns for a 60/40 global equity/bond index were in the mid-single digits, and we highlighted five key themes which formed the backdrop to our investment decision making