At least two Australian investors – Future Fund and Tanarra – have warned that the decade of easy money could be drawing to a close, positioning their portfolios more cautiously to absorb any correction.
Tanarra, an Australian/Asian diversified alternative asset investment firm with A$2.3 billion under assets, has singled out cryptocurrencies and venture capital as two investment areas that are likely to suffer a violent correction at some stage.
“A cocktail of rising inflation, rising interest rates, supply chain disruptions and labour market chaos from Omicron – not to mention global political instability - has severely knocked asset prices of highly rated growth stocks,” founder and chair at Tanarra John Wylie said in a note to investors on February 2.
“For many years now, financial markets have felt akin to living on the San Andreas fault line – occasional tremors, some of them big, but never the ‘big one’.”
He said that central bank and government policy since the great financial crisis had so far shielded markets from any major correction, but that speculative pockets in the market now constituted a real danger.
“The remarkable flowering of cryptocurrencies and all the “picks, shovels, and marketplaces” business models being built around them look like a classic case of late-stage speculative excess - even with reassuring marketing names like ‘stablecoins’,” he said.
Tanarra’s position on crypto was to “watch this one from the spectator” seats, Wylie said, attacking crypto as an asset class that required a “pass the parcel” investor mindset.
He also levelled criticism at the venture capital sector, saying it was ‘no less a bubble’ than crypto.
FOMO, buzz and cheap money
“A lot of investment outside the professional VC sector is in our view being driven by FOMO, buzz and cheap money rather than business models likely to be sustainably successful,” he said, adding that: “A lot of investors are going to find out that it’s a lot easier to get into these businesses than to get out of them.
“While we believe that the flourishing of the venture sector is a great long-term development, we also believe that time-tested investment principles - most startups fail, and caveat emptor - haven’t been abolished.”
Despite this, Tanarra remains an investor in the VC sector with a portfolio of 26 firms in the US, Britain Norway, China, Thailand, Australia and New Zealand and has positioned its portfolio to take advantage of key opportunities going forward.
“We love these investments – they’re based around future technologies, we’ve invested at sensible valuations, they’re performing well, and they give us a window – an information edge – into future technologies and trends that helps our investing across all our asset classes,” Wylie said.
Future fund cautions
Future Fund, meanwhile, has also cautioned that the days of low interest rates and easy money will come under pressure from higher interest rates and inflation.
The A$200 billion sovereign wealth fund delivered a 19.1% return for the 2021 calendar year but chief executive Raphael Arndt believes the easy returns of the last decade or so “just won’t be there”, he told a media briefing following a portfolio update.
Dr Arndt said the Future Fund portfolio would continue to be positioned with a neutral risk setting around the middle of the range it would normally expect.
“However, we have taken some risk off, particularly in the listed equities program, given the run-up in prices and our view is that risk is likely to be less well-rewarded in future,” he said.
He said the fund’s work last year to analyse how the pandemic was accelerating changes in the investment landscape was proving valuable.
“We anticipate lower returns in the future. In response we are seeking out opportunities to access value from less liquid and more skill-based investments and working our relationships with partners to identify more focused opportunities both to secure returns and to manage risk.
“Looking ahead we remain focused on sustaining a portfolio that is as robust as possible to a range of scenarios, and that balances our risk and return objectives.”
Peter Costello, chair of the Future Fund board of guardians, said over 10 years the Fund had delivered a 10-year return of 10.8% per annum against a target of 6.2% per annum however: “The biggest challenge for investment at present is rising inflation, rising interest rates and the effect these will have on asset prices.”
He cautioned that while the Australian economy had come through a period of exceptional stimulation through monetary policy, this policy will have to come to an end. The adjustment, he added, will be significant.
“The Board’s focus is on positioning the portfolio to be resilient to an environment of greater uncertainty and we expect future returns to be lower than in recent years.”