With a priority to protect capital first and compound it over time, rather than take large directional bets on any single macro-outcome, Rob Burdett, Head of Multi-Manager at Nedgroup Investments, comments on how they are navigating the current Iranian conflict within their portfolio.
Rather than trying to forecast precisely how events in the Middle East will evolve, we focus on constructing portfolios that can weather different inflation outcomes.
Our approach is centred on robustness, discipline and repeatability. The priority is to protect capital first and compound it over time, rather than take large directional bets on any single macro-outcome.
We are of course also looking for better risk/reward opportunities being exposed by any volatility.
On inflation specifically, our five-year base case is not for a return to the very low inflation environment that characterised much of the pre-pandemic period, but neither is it for a sustained runaway inflation regime.
We would expect inflation over that horizon to settle above pre-Covid norms, but below the peaks seen in 2022.
A prolonged conflict in the Middle East clearly adds upside risk, particularly through energy and supply-side channels, but we do not think it necessarily represents a structural break into a permanently higher inflation regime.
Even if the conflict is not resolved quickly, the more likely outcome is a near-term inflation shock rather than an indefinitely uncontrolled inflation spiral.
Inflation may prove stickier than hoped, which is why we position for persistence and volatility, rather than building the portfolio around a single benign forecast.
In terms of how we protect against inflation, the key point is that we do this through a number of different levers rather than relying on any one hedge.
Across the portfolios, we remain aligned to structural trends that we believe should outperform over the long term, but we are also very conscious of valuation, diversification and downside resilience.
Markets will always go through periods of volatility, particularly when inflation risk re-emerges, but staying invested in the right assets is important, and periods of weakness can often create opportunities to add selectively where the long-term case remains intact.
From a tactical perspective, one important feature of the portfolios is our bias towards shorter-duration sovereign bonds.
That stance was in place because we were already conscious of inflation risks even before the recent escalation in the Middle East.
In practical terms, shorter-duration fixed income reduces sensitivity to inflation surprises and rising yields, while also giving us the flexibility to reinvest at more attractive yields more quickly if markets reprice.
Alongside that, we have meaningful exposure to real assets and inflation-resilient parts of the market. Our renewables investment trust holdings offer a degree of protection through revenues that are linked, directly or indirectly, to power prices.
Atlas Global Infrastructure also brings significant exposure to infrastructure assets with resilient cashflows, including energy exposure. Our property exposure adds another layer of inflation protection, while energy storage names should benefit from greater power price volatility, which tends to rise in periods of supply stress.
Our property exposure to non-cyclical care homes is also relevant in this context, given its inflation-adjusted rental revenues and strong occupancy profile.
In addition, our gold allocation remains an important store of value and a useful source of protection against both inflation shocks and concerns around fiat currency debasement.
On the bond side, the emphasis is on reduced duration, high-quality exposure and selectivity.
We are not using bonds in the portfolio as a broad expression of optimism on falling inflation; rather, we are using them in a measured and defensive way.
Shorter-dated, higher-quality bonds should be more resilient in an inflation shock and, importantly, allow the portfolio to recycle capital into higher yields more quickly.
This is what we have done to some extent in government bonds in recent days.
Our job is not to predict the next geopolitical twist. It is to ensure that capital is protected and positioned to compound through uncertainty.
The portfolios are built for resilience rather than prediction, and the process is disciplined, valuation-aware and risk-conscious.
Main image: asset allocation, niko-nieminen-E944cBacpPQ-unsplash
