Investment letters

2022 will arguably go down in history as the year when inflation returned with a vengeance while bonds failed to offer investors in balanced funds the much-needed protection and diversification from the decline in equities that they used to provide. The negative correlation between bonds and equities was a welcome feature over the past decades in a low-inflation environment, but the past two years have acted as a strong reminder that it is not a given.

Some investors may choose to increase their equity allocation. Equities are liquid and some types of companies – typically quality franchises with high degrees of pricing power – can even be attractive investments in the event of structurally higher inflation. The disadvantage of equities, however, is that they can experience large drawdowns and high short-term volatility.

We believe that another option is to look for a different approach to investing while adhering to a similar risk-return profile to a balanced portfolio. To cushion the downside risk of a pure equity allocation, an investor may consider the need to add a hedging overlay to their portfolio.

This is an area in which Comgest has been bolstering investment expertise since 2012 to offer investors an equity investment vehicle with lower volatility.

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This paper was originally published in 2021, but was updated in March 2023.