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A note from Dan

A world in transition towards potentially less investment friendly ideas

February 2024,  10 min read

Dan Farmer, Chief Investment Officer

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We may be in a new year but issues preoccupying financial markets in 2023 have carried over into the early part of this year with Middle East events taking centre stage.

As mentioned in my last commentary of 2023, the economic fear over what may happen in that region relates to the potential for a conflict that goes far beyond the Israel and Hamas clash to a wider war involving Iran and its allies, which could trigger such things as materially higher oil prices.

The situation has deteriorated on the back of attacks on commercial shipping in the Red Sea by Yemen’s Iran-backed Houthi movement, which has brought about US-led military responses.

The Houthis are adamant they will continue their attacks while the Gaza conflict persists, and the US is equally determined to stop them as evidenced by a series of strikes on the Houthis as well as other Iran-backed groups. A cycle of tit-for-tat exchanges appears to be locked in across the region.

Around 40% of Asia-Europe trade normally goes through the Red Sea, including a vast amount of energy supplies, food products, and consumer goods, as does about 30% of global container traffic.1

However, because of the attacks, some of the world’s largest container shipping companies have been rerouting traffic to longer journeys around Africa, bypassing the Red Sea, causing delays, and raising global shipping costs.


Red Sea attacks have caused big rises in shipping costs

Change in maritime fright rates in major trade lanes in a week


As of 3 January 2023
Chart: Edwin Lopez/Supply Chain Drive
Source: Freightos

Events are in charge. The rest of us are bystanders.

That said, inflation in major economies has eased2 from the heights of 2022 but the fight is far from over and price pressures stemming from disruptions to global trade may complicate central banks’ task.

Over the past year, there have been times when financial markets have, in our view, displayed wishful thinking, somehow imagining that the desire for an end to hikes in official interest rates, and even hopes for cuts, would somehow bring about change. All the while, central banks have been steadfast in the fight against inflation.

We will continue to be guided by evidence and remain on guard against such views, which can lead to short-term thinking and behaviours resulting in unwise changes in portfolio positioning.

All of this underscores the power of geopolitical dynamics to influence financial markets and economies.

Relationship between global trade exposure and US political polarisation

I also want to touch on US politics, albeit by approaching the subject from a different angle – the relationship between rising trade exposure and US political polarisation.

In doing so, I am indebted to a 2020 paper from four academics3 who conclude that import competition has contributed to the polarisation of US politics by ‘…expanding support for both strong-left and strong-right views, and pure rightward shifts in others’4 in trade exposed electoral districts.

If you believe that markets and economies are downstream from politics, the findings are unsettling.

In the academics’ view, the shock of China’s entrance to the global economy was so fast and great that it overwhelmed the American labour market’s ability to adjust and brought about ‘…shifts in political preferences and economic policy.’5

While the benefits of trade are widely dispersed through such markers as lower prices and greater choices, the adverse effects tend to be localised, concentrated, and political.

In short, they found that ‘growing import competition from China has contributed either to a shift to the political right, or to a polarization where both liberal and conservative forces gain relative to moderates. These patterns manifest in a rightward shift of the media-viewing habits of US adults, greater polarization in the ideological orientation of campaign contributors, and net gains in the number of conservative GOP [Republican Party] representatives, which come largely at the cost of moderate Democrats.’6

The political polarisation also has a racial/ethnic dimension with ‘…White voters disadvantaged by economic changes see GOP [Republican] conservatives as favoring their interests over those of other groups, while disadvantaged minority voters see liberal Democrats as their champions….’7

Trade does not solely explain this opinion of America’s political polarisation: in our view, growing income inequality and the changing demographics of the US each play major and inter-connected roles.

Nevertheless, this research makes a persuasive case that trade with China has created a profound change in US politics, one that is pulling apart a nation so pivotal to the world’s wellbeing.

Of course, the United States is not alone in seeing economic hardship in parts of the population boosting the electoral prospects of political parties and personalities variously described as ‘populist’, ’far right’, ‘anti-establishment’, ’nativist’ and so on.

These movements are riding high in European countries as different as the Netherlands (Party for Freedom), Sweden (Sweden Democrats), Italy (Brothers of Italy), Germany (Alternative for Germany), and France (National Rally).

Beyond immigration and cultural issues, on which they share common ground, they are sceptical about free markets associating them with the loss of blue-collar jobs as well as the undermining of deeply held national identities.

These groups’ impulses are a long way from the pro-market consensus broadly accepted by traditional centre-right and centre-left parties since the 1980s. There is always a risk of pronouncing the end of one era and the start of another, but it is not far-fetched to think that long-established political parties will feel compelled to adopt some of the ideas of these rising movements, including in the economic regulation, trade, and taxation arenas.

If you believe that open markets are positive for long-term investment returns, then, by inference, less open markets are likely to crimp investment returns. These social and political currents should cause investment professionals to think deeply about a world in which the mix of winning and losing industries and companies are likely to be different from those of the current era.

How we think about investing

Rather than changing our investment approach to keep up with a world that appears to be in transition, we have in place investment beliefs that we think are appropriate for all seasons.

1. A great culture is foundational for great investing

A culture that fosters debate; encourages fearless enquiry; values humility; and which rests on trust and collaboration is the basis of great investing.

A free-flow and contest of ideas is a guarantee of the best thinking finding its way into our portfolios and because of that, we oppose investment dogmatism, as well as hierarchies in the way we relate to each other.

We embrace change, and new ways of thinking and investing recognising that what has been effective in the past, may be less so into the future.

2. Investment markets are not always efficient, and active management can add value

Psychological and behavioural elements that influence asset prices are evidence that markets are not always efficient and asset prices do diverge from their ‘intrinsic value’ over investible time-periods.

This presents opportunities for skilled active management to add value and through that deliver stronger long-term returns than would be possible by investing passively. That said, we reject the notion of tensions between active and passive assets in portfolios.

The two forms of investing are symbiotic. They enable each other.

At the same time, the inclusion of high-quality private market assets with valuation cycles that differ from public assets, and which present the opportunity for direct operational and financial improvements, can move diversified portfolios’ efficient frontiers upwards without increasing volatility.

3. Skilful diversification delivers strong long-term returns

Skilfully constructed multi-manager portfolios made up of a wide breadth of asset classes, many assets within asset classes, risks, investment styles, and investments across many geographies maximises the odds of achieving strong long-term returns while managing risk.

Successful investing relies not just on strong performance in rising markets but also on preserving investors’ capital in hostile markets. The combination of skilful diversification and active management is the best way of achieving these dual objectives.

By bringing together our internal investment capabilities with those of our external managers, our clients benefit from a great breadth of ideas, constantly countering the group-think threat.

4. Intelligent risk-taking is a must

It is understood that some risks must be taken to achieve return objectives. However, not all risks are equal.

Intelligent risk-taking, when proprietary insights suggest favourable odds of success, is essential to achieving return objectives.

Our role as active managers is to assess the range of possible market outcomes and position portfolios so that they maximise the chance of meeting clients’ return expectations while minimising exposure to risks unsupported by high conviction.

We believe the consideration of environmental, social, and governance (ESG) factors is indivisible from active management as companies that best manage ESG risks are more likely to be financially sustainable in the long run.

5. The long-term matters, but managing market events that can sideswipe portfolios matters too

Deeply held investment convictions, sound temperaments gained from navigating multiple market cycles, and structures and incentives that reward patience and perseverance, support our long-term focus.

Nonetheless, we are acutely mindful of occasions when market events of potentially great severity can, if unheeded, undermine years of accumulated returns. Our risk-aware practice keeps us vigilant to possible threats enabling us to play defence and offense equally in such situations.


“We’re not in Kansas anymore”

Fans of the Wizard of Oz will know a line from the movie when Dorothy says to her dog, at one stage, “Toto, I've a feeling we're not in Kansas anymore.”

It conveys that we have stepped outside of what is normal and familiar and now must deal with the unfamiliar and uncomfortable.

“Kansas,” for investors from the 1980s to about two years ago, was a world epitomised by structural falls of inflation and interest rates, and the implementation of market-friendly policies by centre-right as well as centre-left governments across many parts of the world. Strong asset market returns were one result.

The recent past has emphasised how far we have moved from that world. Inflation is stubbornly resistant despite the great pace at which central banks have raised interest rates. Free-market ideas, characterised by globalisation, are becoming lonely, and regulatory and protectionist impulses are gathering strength, in part because of anxieties over wealth inequality.

What worked for four decades is unlikely to be fit for purpose, into the future. The timeless principle of diversification needs to be reimagined, and that is what we are doing.

Making portfolios inflation-resistant is top-of mind, beginning with the management of equities and bonds.

Investing broadly, whether through passive or quasi-passive strategies, proved to be a cost-effective way of accessing strong equity markets returns. However, with prospective share market returns likely to be more challenging, active-management and good stock selection, with the ability to identifying companies with pricing power, will come to the fore.

Rising discount rates depress price to earnings ratios (PEs), especially those associated with long-duration cash flows. This is not a revelation. Consequently, being mindful of companies’ valuations will be especially important to successfully navigating inflation, along with earnings resilience and persistence.

Private markets investing is likely to gain even more attention as a source of potentially strong return generation beyond that available from listed equity markets. Investors and managers can directly influence companies’ business strategy through private equity investments, and by doing so drive operational and financial improvements.

Traditional fixed income asset values have been knocked down by rising interest rates. The fact they have been hit so hard also means their future return potential is now more attractive than they have been for some time.

There are also opportunities in the much harder to access world of esoteric private credit, which can provide very attractive yields along with diversification benefits. Investing in such assets can be especially rewarding where the loan-collateral are high quality assets and cash flows uncorrelated to the broader economy, for example, lending for legal receivables and government backed receivables.

In both cases, investors get paid well to take risk regarding when a payment is made, but with relatively lower risk as to whether it will be paid compared with mainstream credit investing (arguably making it a better diversifier). Many of the underlying yields associated with esoteric private credit assets are set at a fixed premium above the cash rate, which means overall income payments rise with interest rates.

Unlisted infrastructure assets providing essential services, such as electricity transmission, are another group of inflation-resilient investments thanks to regulatory regimes mandating inflation linked indexing of income streams. That said, investors need to tread carefully as competition for such assets can be intense, and purchase price discipline coupled with careful asset selection must be paramount.

There’s no time to be lost in configuring portfolios to make them fit for the new era.



1 How attacks on ships in the Red Sea by Yemen’s Houthi rebels are crimping global trade. Courtney Bonnell and David McHugh, 13 January 2024,
2 Inflation rate, average consumer prices. Annual percent change. International Monetary Fund,
3 Importing political polarisation? The electoral consequences of rising trade exposure. David Author, David Dorn, Gordon Hanson, and Kaveh Majlesi, American Economic Review 2020, 110(10): 3139–3183
4 Ibid
5 Ibid
6 Ibid
7 Ibid



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