Depending how you’ve been invested over the past 10 years, you might be feeling some satisfaction with your portfolio performance. The 2010s have delivered extraordinary returns across financial assets. Global bonds have returned 49%, Asian stocks 74%, European stocks 102%, and the US market 245% since the end of 2009. For developed market equities this has been the best decade since the 1980s. Correctly picking the growth stocks from the US market would have generated even greater returns. The Nasdaq has returned 325%, with Apple, Microsoft, Alphabet, and Amazon creating USD 3.5 trillion in value.
How will investors boost their portfolio performance in the next decade, while minimizing the chance of regret? In this letter I look at three key strategies:
First, remain invested in equities. Although returns are likely to be lower in the 2020s than the 2010s, we believe stocks are still likely to outperform other publically listed asset classes. It might seem hard for investors holding cash to buy in now after such a sustained rally, but investing is about looking forward, not back. Systematic put selling or capital protection strategies are both approaches that can help investors manage their fears around near-term equity volatility.
Second, allocate toward longer-term growth trends within equities. Large-cap technology stocks probably won’t repeat their performance of the last decade, but other parts of the market do have the potential to deliver above-average growth. We look to stocks focused on sustainable investing, digital transformation, genetic therapies, and alleviating water scarcity.
Finally, look for alternative risk premiums. With the available returns from public markets likely to be relatively muted, investors should think carefully about whether they could boost their returns by taking advantage of illiquidity premiums in private markets. If you are not likely to need to access a portion of your funds in the medium term, you could shift assets you would otherwise allocate to liquid public equities into private markets, and earn additional potential return. Over the course of a decade an estimated 1–3 percentage point illiquidity premium per year translates into an additional 10%–35% gain.
We prefer to take more risk by finding alternative sources of yield, notably in emerging market sovereign bonds, and through our preference for the Indian rupee and Indonesian rupiah relative to the Australian and Taiwan dollars. For more information on our latest positioning, please see our preferences tab at the bottom of the page.