Morning Note: Market News and our view on Generational Investing

Market News

The US bond market ended the week with solid gains as a soft reading on retail sales revived bets on Federal Reserve rate cuts. Traders now expect the next reduction in September, versus December previously. Data for January came in lower than expected at -0.9% vs. -0.1% forecast. 10-year Treasury yields fell by 5 basis points to 4.48%. The dollar hit a fresh low for 2025, while gold fell below $2,900 an ounce. US equities ended the week close to all-time highs – S&P 500 (little changed on Friday); Nasdaq (+0.4%).

Geopolitics remains at the fore, with investors remaining cautious due to tensions between the US and European Union over tariffs and the war in Ukraine. US and Russian officials are slated to meet in Saudi Arabia this week. European officials are said to be working on a major defence spending package that will be announced after the German election.

President Donald Trump said he would unveil new tariffs on automobiles, adding to a wave of sweeping import levies as he seeks to remake global trade relationships and pressure companies to move production to the US.

In Asia this morning, equities kicked off the week on a positive note: Nikkei 225 (+0.1%); Hang Seng (+0.2%); Shanghai Composite (+0.3%). The yen strengthened after Japan’s GDP rose more than expected. Goldman boosted its target for Chinese equity benchmarks.

The FTSE 100 is currently little changed at 8,735. The board of healthcare landlord Assura has rejected a £1.56bn takeover offer by funds managed by KKR and the Universities Superannuation Scheme. 10-year Gilts yield 4.60%, while Sterling trades at $1.2585 and €1.2010.

Source: Bloomberg

Investment View - Generational Investing

When it comes to making money, concentration is often your friend but when it comes to keeping it over the very long term, concentration is your enemy. Just ask Michael Saylor, CEO of Microstrategy and he of Bitcoin fame. Back in the original tech boom in 1999, Microstrategy’s share price exploded twentyfold and Saylor’s net worth was $7bn at the peak. Two months and one accounting irregularity later the shares were down 95%. Over the next couple of years the shares fell another 95% (yes, that is possible) and the once multi-billionaire was no longer such. Twenty five years later, Saylor has done it again with his venture into Bitcoin, with his net worth currently reported to be over $8bn. One wonders whether he will do a better job of hanging on to some of it this time.

While this may be an extreme example, what typically creates wealth of any scale is one large, concentrated bet, usually on yourself, which generates a combination of surplus income and capital that can be saved. While it is tempting to think of wealth being passed down through the generations the reality is that 70% of wealthy families lose their wealth by the second generation, 90% by the third generation. So, what’s going on? It turns out that the key to keeping wealth over long time periods requires a very different strategy to what creates it in the first place.

Let’s say you’ve got enough, or more than enough. How should you think about protecting what you have? All of the returns quoted below are from an excellent paper (1) “What is the Safest Investment Asset” Cambria Investments, June 2023 and based on US markets over the last 100 years. Starting with “risk-free” short-term Treasury bills, in nominal terms they have delivered 3.4% per year with zero drawdowns. However, as investors we are interested in real (after inflation) returns. After inflation, the maximum real drawdown in the “risk-free” asset was 49%. Periods of high inflation such as the 1970s and more recently after Covid in 2020 often lead to material losses in real terms as, often for political necessity, cash rates are held materially below the rate of inflation. As an aside, good, old-fashioned cash under the mattress lost 95% after inflation over 100 years.

What about other financial assets? Over the period, the worst peak to trough drawdown in real terms were as follows: US stocks -79%, Global stocks -78%, 10-year Treasuries -61%, Gold -85%. The point is that if avoiding a material drawdown in real terms is top of your investment objectives, which it should be, then the message here is that nothing is really safe. What is more, these drawdowns can last a very long time. The worst 10-year returns are T-bills -42%, US stocks -45%, Global stocks –71%, 10-year Treasuries -44%, and Gold -65%.

Clearly, a concentrated bet on a single asset looks risky but what about if we diversify by combining assets? It turns out this done the traditional way doesn’t really help. The much-vaunted 60/40 equity/bonds still has a maximum drawdown over the previous 100 years of 54%, not much better than 10-year treasuries. The reason that this traditional diversification model has such a bad drawdown is that in real terms, both stocks and bonds hate inflation. Equities and bonds are excellent diversifiers when inflation is contained and rates can fall, but not when yields are forced higher across the curve by inflation.

Are there are things you can do to reduce this worst outcome and diversify better? Yes. Although they are a much smaller universe, there are assets and strategies that can deliver when the more traditional building blocks of the portfolio fail. They include allocations to precious metals, energy, materials, hard commodities as well as trend following and diversified alpha strategies, all of which can perform during inflationary regimes. However, this diversification can often underperform more traditional assets, often for longer periods than clients can stomach, making “sticking with it” extremely difficult. Nevertheless, this is what certain “all-weather” strategies aim to achieve and what we strive for in our own unconstrained mandate.

The uncomfortable reality is that unless you can time changes in your asset allocation very well, over a long period of time (generational wealth) there is no combination of assets you can own where your wealth won’t decline by at least 30% on a real basis. That which is very unlikely to happen this year or next, is almost certain to occur at some point if one takes a generational perspective. Clearly, over shorter time horizons, such as an individual’s retirement, there are things you can do to reduce the risk of such material drawdowns. While even this may sound incredibly painful, “forewarned is forearmed” and if you are an investor of any stripe, you are playing this game whether you like it or not. The reason that it should be at the core of an investor’s investment strategy is that a 30% drawdown requires “only” 42% to get back to the peak. A 50% drawdown requires 100%. The depth of the hole one ends up in matters a lot when beginning the task of climbing out.

1. https://www.cambriainvestments.com/wp-content/uploads/2023/06/Whitepaper-What-is-the-Safest-Investment-Asset-Jun23.pdf