Bubbles Everywhere or Just the “New Normal”?

There has been a growing chorus of investors and pundits decrying bubbles in nearly every major asset class – rates, credit, equities, and even (once more) property.  Even the Bank of International Settlements recently joined in stating “Financial markets have been exuberant over the past year, at least in the AEs [advanced economies], dancing to the tune of central bank decisions.”

At the same time, there are a number of large institutional asset managers that justify valuations on the basis that rates are and will remain for the foreseeable future at very low levels – an idea dubbed the “New Normal.”

So which is it?

We believe that successful investing over the long term is not predicated on getting these calls right.  Instead, the key is to stay well diversified – not just across asset classes as they are traditionally defined but across strategies and, ultimately, economic drivers of return.  For instance, today a typical Gatemore client portfolio might include the following strategies:

Absolute Return  
•    Equity long/short – healthcare
•    Equity long/short – REITs
•    Equity long/short – TMT
•    Equity market neutral
•    Credit – multi-strategy
•    Credit – distressed
•    Quantitative trend following

Market Driven (Long Only)
•    Developed market equities
•    Emerging market equities
•    Asset-backed securities
•    Chinese consumer equities
•    Direct lending – special situations
•    Emerging market private equity
•    Regulatory capital – structured credit

Real Assets
•    Asian property
•    European property
•    US property
•    Commodity futures

Of course being so well diversified does not immunise a portfolio from drawdowns in stressed market environments.  We do believe, however, that it enables us to preserve capital during a market shock yet capture much of the upside of a bull market – without having to make big bets on market timing.  This is the same approach we have been using since our inception – through bull markets and financial crises.  While we are as concerned as anyone about frothy valuations and may make small adjustments along the way, we are as committed as ever to our approach of true diversification – the only “free lunch” in finance.