The investment Committee that runs our Gaia portfolios met today.
Equity markets have risen strongly in recent months, as investor enthusiasm over the AI story has driven technology shares, particularly those of the mega cap companies, to ever higher levels. However, in the run up the meeting, concerns about the ability of these companies to generate adequate profits from the large amounts that they are spending on AI caused volatility in markets, with these same shares selling off. With geopolitics remaining highly unpredictable, and debt levels across many governments a concern, the risks to investors remain clear, and are in plain sight.
In this somewhat frothy environment, sustainable assets have risen, but lagged wider markets. Whilst it is always hard to parse exactly what drives asset prices, the determined efforts from the current US administration to rotate the US away from the energy transition, whilst calling into question widely accepted views on climate change, has certainly hurt investor sentiment around companies working in this space. When added to President Trump’s attempts to re-work the US healthcare system, another sector to which the portfolios have structurally high exposure, and their naturally lower exposure to the ‘Magnificent 7’ mega cap technology companies that have performed so strongly, and the causes of the short-term relative underperformance are reasonably clear.
The committee debated all such issues, and agreed that, whilst much has happened, the picture is no clearer around key issues such as the path of inflation, the potential for interest rates cuts from the US Federal Reserve, and to what degree capital expenditure on AI may prove to be less rewarding than the technology companies hope. Add in the ever-unpredictable nature of the US administration, and it is clear that, whilst the questions that investors need to ask remain clear, the answers are far from obvious, not helped by a lack of data arising from the recent record US government shutdown.
Furthermore, whilst politicians can impact investor and corporate behaviour to some degree, especially over the shorter-term, there is little evidence that they are able to stall the multi-decade trends in which the portfolios are invested. As such, the committee saw no evidence that the theses on which the investments within the portfolios are made are challenged.
Taking all of this into account, the committee agreed that no action was required at this point, for two reasons.
Firstly, from a macro-economic perspective, the committee felt that acting without a clearer picture would be unwise, akin to guessing. Furthermore, it felt that the current positioning of the portfolios remained suitable based on what is known, namely a neutral position in equities, an underweight to Fixed Interest over concerns about current levels of government debt and a lack of value in bond markets, and overweight positions in Absolute Return and Volatility, the last to protect against the uncertainty mentioned already.
Secondly, with no evidence that the themes in which the Gaia portfolios invest were diminished over a longer-term horizon, and with sustainable assets trading at a discount to the wider market on several metrics, the committee believed that the long-term prospects for the portfolios remained strong, even if short-term noise was impacting them somewhat.
