Quarterly Investment and Empire Managed Account Portfolio Update

  • Buoyed by strong performance from active equity managers, the Empire Growth, Balanced Growth and Balanced Income (SMA) * portfolios delivered returns well above benchmark and peer portfolios over the December quarter.
  • Empire’s targeted approach to fixed income continues to pay off. While a traditional Australian bond portfolio would have sold off over the last year, our skill-based managers have added value for our investors.
  • Diversifying strategies added to performance. Our investments in property, infrastructure and alternative assets all contributed to strong monthly and quarterly

Zooming out, covid continues to hold the world in thrall despite rising vaccination rates and, in most places other than China, a shift in attitude away from COVID-zero towards COVID-tolerance.

The Omicron variant, though less virulent than previous strains, has spread so quickly that developed economies are once again running into severe labour shortages. Omicron is likely to cause yet another economic slowdown. Shelves in supermarkets could go bare like it’s 2020 as the virus exacerbates supply chain issues and potentially contributes to a rise in inflation. The extent to which Omicron has hit the economy should not be understated. Normally, 3-4% of a given workforce is absent. Currently in New South Wales, almost half of workers are missing time due to COVID. Omicron’s effect on economies, inflation and central bank responses to inflation continue to be the dominant themes driving short term market outcomes.

Despite the malaise caused by Covid and the prospect of inflation, international stock markets soared over the December quarter. A broad basket of global shares, whether hedged back to the Aussie dollar or not, delivered returns of over 7% in the December quarter. Pleasingly, Aoris, one of Empire’s preferred global managers delivered a quarterly return of over 16%.

Australian shares have been less buoyant in comparison to global counterparts, with a 3-month return of just over 2%, most of which came in December alone. Empire’s SMA * active Australian managers, Ausbil and Alphinity, both added value over the market for the quarter.

Bonds, which typically don’t grab headlines like equities do, continue to eat up investor time and attention. Australian bonds had another negative quarter, while global bonds were flat through the three months to December. Empire’s SMA* bond portfolio, which emphasises skill-based specialist strategies, continues to behave as intended. While our interest rate sensitive strategies, run by Jamieson Coote Bonds, experienced returns in-line with the broader market, our diversifying credit and inflation-based strategies have added value over the past year.

Turning to other diversifying strategies, Empire’s SMA* portfolio dedicated allocations to property and infrastructure were strong contributors to performance. The Quay Global Real Estate Fund, our high conviction global real-estate focussed strategy has been a standout in 2021, delivering an annual return of 37.83%, including 9.75% over the quarter.

While the results of the past quarter are pleasing, we continue to believe that holding to our strategy and avoiding the temptation to try to time the market by reacting to recent news leads to superior long-term results. Therefore, our approach has, and continues to be, to build robust, diversified portfolios with an emphasis on holding higher weightings in quality businesses.

In the remainder quarterly update, we present three market themes worth noting, each of which has the potential to shape investment outcomes in the near term:

  • The emergence of Omicron as the dominant strain of the COVID virus.
  • Compensation for workers has been rising faster recently than at any time in the last decade.
  • Inflation continues to spook markets, having now exceeded levels not seen since before the
    year 2000.


Market and Strategy Highlights:

Figure 1: Omicron, A Lesson in Exponential Growth


In our previous quarterly update, we posted a graph showing the spike in cases caused by the Delta variant of COVID, which was dominant at the time. In hindsight, Delta was a blip on the radar compared to Omicron. Government policy that favours re-opening to restrictions and the greater transmissibility of Omicron have led to a number of infections that are an order of magnitude greater than previously seen in Australia.

What happens from here is difficult to predict, as outbreaks tend to pair competing disinflationary hits to demand with inflationary disruptions to supply chains.

Figure 2: The Rise of Labour

Source: Federal Reserve Bank of St. Louis

After stagnating for more than a decade, labour shortages caused COVID have led to real growth in wages. While the causes for this are myriad, the trend is obvious. For the first time since June 2009, wages are rising for all workers.

The effect of this wage growth is almost certainly contributing to inflation in the short term. Longer term effects are harder to pick, as wage growth has the competing effects of placing more money in peoples bank accounts, boosting demand, while increasing labour costs for companies, which could weigh on stock prices.

Figure 3: The Path of Inflation and Rates

Source: Federal Reserve Bank of St. Louis

Inflation continues to increase in the US. This matters for Australians because the US Federal Reserve sets the tone for central banks globally; as the saying goes, when America sneezes the world catches a cold.

If, as the market anticipates, the Federal Reserve raise rates to stave off inflation in 2022 it could lead to repricing across asset markets. US Treasury rates are a good proxy for the risk-free rate, which is a key building block for pricing almost all other assets. If the US raises rates faster than the market anticipates, it will have a negative effect on asset prices across the board.

* Note that performance and fund manager references are applicable to the Empire Growth, Empire Balanced Growth and Empire Balanced Income Separately Managed Account (SMA) portfolios. Not all Empire clients are invested in the same portfolios, and fund manager and market commentary should be interpreted in line with your chosen investment selection

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