Update for Investors - DMG Diversified Portfolio

6 February 2018

As part of our role as Investment Manager, we felt it important to provide you with an update to address the recent events in financial markets and what we are doing about it.

Already you will be seeing, hearing and reading reports that lead the news bulletins about the level of losses. The losses and big numbers make for great headlines to lead the news. The recoveries are usually relegated to the finance section. 

There are some key points we want to make. These are;  

  1. Your investment in the DMG Diversified Portfolio (DMGDP), is not 100% invested in shares. So when you see the share market falling, the DMGDP is not falling to the same degree. At the moment we have around 2/3rds of the fund in shares.   
  2. We hold cash and secure investments.
  3. We hold alternative investments that have the ability to make money when share markets fall. I know this sounds counterintuitive, but it happens in the finance world.
  4. The DMGDP was established to provide a greater degree of protection (not immunity) in situations such as this.
  5. We have delivered this protection in similar periods, such as Brexit and the period at the start of 2016, when there were concerns about China.
  6. Bart Dowling, our Portfolio Manager has considerable hands on experience through many cycles such as these. I have also been through many cycles dating back to 1987.
  7. The Investment Committee and in particular Bart, is continuing to monitor the markets and the portfolio on a daily basis.
  8. Losses such as these are normal in terms of share market fluctuations. The recent past which has been relatively smooth and certainly less volatile was not normal.
  9. Share markets endure periods where they lose 10% every 2 or 3 years, sometimes we see 20% falls and on rare occasions the falls are even greater. Again this is normal and markets do recover. 

A concern for the markets is increasing interest rates. Earlier today Bart provided an update and said that “Is this the start of the ‘big one’ in terms of equity market corrections/crashes? We don’t think so. Even though we are at the mature stage of the investment cycle, central banks globally are only just embarking on their tightening phase. The RBA is yet to raise rates, the European Central Bank and Bank of Japan still have a very accommodative monetary stance and the US Federal Reserve (the central bank markets are presently fretting about) and Bank of England are only in the early stages of tightening.

Indeed, the Investment Committee discussed at length the prospect of some form of near term market correction at our last investment committee meeting and it was decided that the best thing to do is to ride through the turbulence – as uncomfortable as that may feel – while ensuring we have enough defensives in place to help preserve capital on the way down. What we discussed is that bumps such as the one presently being experienced become far more common as the investment cycle matures. To put it into context, there were 7 downward market moves in excess of 5% during 2006 & 2007 in the lead up to the GFC in 2008. Similarly, during 1998 & 1999 there were 5 such moves prior to the bubble bursting in 2000/01. Even though they had this spate of negative performances, markets overall averaged a +17.6% positive annual return over these years.

Remember, markets are selling off in response to what can be deemed to be ‘good’ economic news – strong employment and rising wages in the US (ironically in terms of the latter, the markets were lamenting about being non-existent only a couple of weeks ago - which only goes to prove you need to be careful what you wish for).

The reason why the present bump appears so uncomfortable is that it comes after an elongated period where volatility has been virtually non-existent - so it comes as somewhat of a rude shock. Rather, when we really have to worry is when central banks go on the war path and begin to aggressively raise rates in a concerted / coordinated fashion. As stated above, we are still some way off this occurring.

So for the time being, as uncomfortable as it may feel, the Investment Committee feels it is better to ride through these bumps. But rest assured should the unexpected happen and the present downswing somehow morphs into something far more sinister we will have no hesitation in building upon our already extensive armoury of defensives and adopt a far more conservative asset allocation."

We will continue to keep you informed as appropriate.

All the best

Gary Lucas

Upcoming Events

A reminder of the opportunity to attend the lunch time investor information sessions with our Portfolio Manager, Bart Dowling. Held at the DMG Sale office.  
This will be held after our next monthly Investment Committee meeting on Wednesday 28th February at 12.30pm. Please contact Simone Belcher- sbelcher@dmgpm.com.au if you would like to attend, seating is limited.

Erin Neumann