BIP Wealth began 2022 with a stark warning for investors about the risks of investing in both the stock market and the bond market. These risks materialized in the first quarter, resulting in mid-single digit losses to the equity and fixed income indexes we use to benchmark our investing performance. But, hidden in the performance of the broad indexes was some good news for BIP Wealth investors.
We saw the MSCI Global Equity Index fall 5.47% in the first quarter due to the necessary reversal of pandemic stimulus. Consumer spending power declined as the Federal government slowly realized that it had gone too far, and the froth came off many stocks. But value stocks, which are modestly priced for the earnings they provide, didn’t do too badly. Our over-weight of value stocks within all our public market equity portfolios provided some shelter from the storm that raged over the high-flying growth stocks that have grabbed the headlines in years past. It was a sharp rebuke to many self-directed investors who have grown accustomed to believing the hype of the financial media, and a reward to investors with patience and an eye towards valuations and the value of research.
We saw the Bloomberg U.S. Aggregate Bond Index fall even more, with a loss of 5.93%–stunning for investors still expecting to find safety in fixed income. The writing was on the wall for this kind of loss, as we explained last quarter. It’s the inevitable result of inflationary policies of the Federal Reserve, in defiance of their Congressional mandate to preserve price stability. Our focus on safer, shorter-term bonds, helped our investors to avoid the worst of things. And the choice by many investors to round out their fixed income portfolio with our options-based strategy, called BIP Hedged Yield, helped even more.
Many of our investors have enjoyed unusually good news from their investments in venture capital and private credit investments over the past few years. And we’re seeing a lot of cash on the sidelines as a result. We encourage our investors to consult with their Personal Wealth Advisor to determine just how much should be invested in less liquid private market investments and what to do with any cash proceeds not ear-marked for redeployment.
We’re not sure the worst is over in either the stock market or the bond market, and the addition of global military conflict to the long list of risks that could add more volatility is worrisome. While it may feel like a mistake to participate in volatile and risky markets, investors have little choice. Hiding in cash during periods of high inflation like we’re experiencing now simply guarantees a loss of purchasing power. Put simply, “capital preservation” as an investing strategy simply does not exist in today’s world. Investors have to be in the game because there is no place to hide.
This is Eric Cramer, Chief Investment Officer for BIP Wealth.
Disclosure: This communication contains general investing information that is not suitable for everyone and is subject to change without notice. Past performance is no guarantee of future results and there is no guarantee that any views and opinions expressed will come to pass. The information contained herein should not be construed as personalized investment advice, tax advice, or financial planning advice, and should not be considered a solicitation to buy or sell any security. Investing in the stock market and the bond market involves gains and losses and may not be suitable for all investors. The Global Equity index is the MSCI ACWI IMI Index, which is a free float-adjusted market capitalization weighted global index selected as the best available proxy for a diversified stock portfolio consistent with modern portfolio theory. Approximately 60% of the index is comprised of the U.S. stock market and 40% is comprised of international stock markets, including both developed and emerging countries. The “Net Total Return” version of the index is reported here, which means the index reinvests dividends after the deduction of withholding taxes, using a tax rate applicable to non‐resident institutional investors who do not benefit from double taxation treaties. The U.S. Fixed Income index is the Bloomberg U.S. Aggregate Bond Index, which is a broad-based benchmark selected as the best available proxy for a high quality, diversified fixed income portfolio suitable for a U.S. investor. It is comprised of the Bloomberg U.S. Government/Credit Bond Index, the Mortgage-Backed Securities Indices, and the Asset-Backed Securities Index. It is an unmanaged market value-weighted performance benchmark for investment-grade fixed-rate debt issues, with maturities of at least one year, and an outstanding par value of at least $100 million. The “Total Return” version of the index is reported here, which means that dividends are included and reinvested.