Key read
- Historic returns for bonds and equities were driven by strong secular trends, some lasting for more than 30 years. These trends were the enablers of the strong economic growth experienced—during the last 20 years some 1.5 billion people were driven out of poverty, generating a virtuous cycle which is now most likely coming to an end.
- There are a couple of reasons for lower returns. First, equity valuations are elevated in DM, especially in the US, where proactive management methods were used to polish up per share revenues. Second, interest and inflation rates are expected to rise, and while higher returns are positive for investors seeking income, there is a higher cost of capital for companies associated with this. This implies a change in capital use (allocating more for servicing debts reduces the resources available for future returns).
- Opportunities to generate attractive returns in a world with elevated stock prices do exist; the key is to run a diversified portfolio, including a number of strategic investment solutions.
Where are the real opportunities?
The investment returns achieved during the past decade should be considered as a fluke in history. They occurred mostly on the back on bold Central Bank market interaction; in fact, only in very rare cases does true innovation translate into strong investment return. One such unusual case is the story of the rise of AMZN, a textbook example of an entrepreneurial vision made good. Today, AMZN has probably reached maturity, and adhering to its business model is no longer considered to be as risky as it once was.
In the final analysis, investment success boils down to an informed understanding of the risks. Any investment opportunity carries a certain level of risk, and in fact, our portfolio structures may entertain an above-average level of risk. However, achieving an actionable, in-depth understanding of risk means doing your homework—careful probability-analysis of projected future events and their likely impact.
Identifying, evaluating and understanding risks is our strength. Our careful analytical procedure is applied with due diligence to every single investment opportunity included in our master list. If a specific instrument is included, it is because it successfully passed our “onboarding process” and has been allocated a specific level of risk. In turn, this risk level will be taken into consideration when making your allocation.
The proposed allocation below reflects our optimal allocation, taking into consideration today’s concerns and opportunities for the years ahead. Since we are truly focused on the future, the allocation is centered around the following:
- Artificial intelligence
- Mobile communication
- Digital society
- e-Commerce
- Changing consumer patterns
There is a strong bias towards companies in emerging markets; we consider them to be the most likely main drivers for future innovation, over and above their DM counterparts. We believe that EM have reached the point where they can create home-grown, value-added products and services more efficiently than DM can. We provide individual fact-sheets along with propositions, giving more details that enumerate each particular opportunity and the risks to be undertaken.
As a final note, IRISOS is fundamentally an equity management company. We undertake investments in a measured manner, but we are not able to guarantee their outcome since the underlying factors are outside our control. We adjust for new risks that arise or are expected to arise; however, avoiding them all together would mean having no market exposure. While our base-case scenario returns look highly attractive, investors are advised to consider its potential for a downside as well; we fully respect that some may opt out of our proposition.
