The end of Powell´s first recession

Through the summer and into the first half of August Fed has kept US treasury yields at historically low levels and global equity markets moved up. As our algorithms are well into positive territory, we hold maximum equity allocations across our strategies and with the increased allocations to 30% high yield in our multi asset strategies, our mandates and funds have delivered solid returns recently.

In recent months US, employment has grown by millions, business confidence has rebounded from depressed to expansionary levels, new orders and investment are moving up, and retail sales and private consumption is increasing again, so from an economic point of view we are now past the first US recession with Powell as head of the Fed.

The most relevant question for investors in our view, therefore, is how to create attractive risk adjusted returns in a situation where the US Congress keeps spending and the Fed keeps it company while also contemplating the longer term control of yield levels. Should we be wrong, and the stimulus stops, the right place to be will be in high grade government bonds and we will shift decisively into such assets as soon as our algorithms signal it is time to reduce risk, in February March it took 2-3 weeks for us to shift. From current levels is could be even faster. This is not the case yet.

In the Global Fixed Income strategy, we moved out of high-grade bonds in May and June and now maintain a portfolio with 100% high yield bonds. Both the model portfolio shown in Figure 1 and the associated mandates and the fund showed solid returns in July and early August.

The Systematic equity allocation strategy has moved from zero to 100% equities in May and June, maintains a 100% allocation to equities with a focus on the technology heavy S&P 500 and Nasdaq.

Our Diversified multi-asset strategies are all at their respective maximum allocation of 50% equities with additional allocations of up to 30% high yield bonds, leading to solid returns recently. In the Diversified fund that we are managing in collaboration with ACCI, the equity weight has been increased after an amendment of the prospectus and we now hold 58% equities.

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