(Marta Norton, Morningstar) In February, I watched with horror—alongside the rest of the world—as Russia’s invasion of Ukraine unfolded. The loss of human life was tragic. The heroism of everyday people was astonishing. And it continues to grip the world more than a month later. My thoughts and prayers are with those who are suffering, and I wish an end to the conflict and the suffering as soon as possible.
We have no crystal ball for geopolitical conflict. We didn’t foresee the war and we don’t have any special insight into its outcome. We can certainly measure the economic cost—climbing crude, grain, and metals prices, increased shipping and transportation costs, and further supply-chain disruptions—but we won’t know before anyone else whether the conflict intensifies or abates.
So how do we manage client assets, protect against losses, and compound returns in an interconnected world where unforeseen conflict an ocean away can cause sudden market losses here in the U.S. and impact the price we pay at the gas station down the street?
For us, it comes down to robustness. As we survey the world for investment opportunities, we not only look for asset classes that are selling beneath our estimate of their fair values, but we also consider whether the asset class we’ve most recently identified is dependent on different variables than what we already own. For example, while we own asset classes that are more closely tied to Eastern Europe—European banks, for example—we also own Mexican stocks, which we like in part because they offer a higher allocation to consumer staples, a sector of the economy that tends to be more defensive.
We carefully consider asset-class behavior, looking for markets that can offset one another. In today’s climate, that means we are still willing to own long-term Treasuries to protect against the possibility of market turmoil, though we also allocate to alternative strategies that tend to act defensively and haven’t shown great sensitivity to interest rate movements.
Despite these best efforts, it nevertheless remains critical that we also acknowledge uncertainty and the limits of our ability to forecast. For example, our assessment of Chinese technology companies suggests they are selling at attractive valuations after a year of losses. However, we can’t predict the potential of Southeast geopolitical conflict or anticipate the actions of Chinese regulators, who tend to take a decidedly different approach to regulation than we see in the U.S. As a result, when we size our positions in China, we limit our exposure to levels that would protect the overarching portfolios from significant losses should unforeseen events occur.
Portfolio management is an exercise in probability, offsetting one possibility with another and ultimately constructing a portfolio that is diversified across a range of potential economic and market outcomes. We believe this practice, alongside an emphasis on asset classes that are selling beneath our estimate of their fair values, will propel portfolios forward—even in the face of an uncertain future.
As always, thank you for your trust in our efforts. We don’t take it for granted.
