Rothschild Wealth Management’s New Court Fund has increased its losses to 0.5% in the second quarter for a 0.7% YTD loss, but it continues to argue that accepting poor results now is the best way to protect its clients’ assets over the long term. It has also increased its cash holdings from 15.1% to 19.3% of AUM.
“We believe that the ‘cost’ of holding cash is, in part, a function of the opportunities available elsewhere. When cheap assets are plentiful, sitting on cash is expensive, given the returns you are foregoing, says the New Court Fund investor letter. “When compared to the alternative of owning some of the overpriced assets we see today, cash is particularly appealing. If asset prices keep rising and become more extended, our holdings in cash are likely to rise further.
Rothschild would rather wait for prices to drop than chase returns now
Aside from generally pointing out that valuations seem high, the Rothschild New Court Fund letter explains that the pace of the global recovery, particularly in developed markets, has been extremely slow and continues to be by most measures. Asset prices and corporate profitability have been strong, but this seems to be a case of unprecedented monetary policy benefiting a fairly narrow group of people.
The letter states:
Against that backdrop, the Occupy Wall Street movement has constructed a simplistic narrative in which 99% of the
population are rising up against “the greed and corruption of the 1%” to “kick the ass of the ruling class.” Antiestablishment parties and politicians have tapped into discontent with the economic status quo and their popularity
surged in the recent European elections. A book by French economist Thomas Piketty, arguing that capital is once more
drifting towards oligarchy and advocating a global tax on wealth, has become an unlikely bestseller.
To summarise without engaging the political arguments:
inequality has risen since the financial crisis. Historically, this has tended to exacerbate social tensions and occasionally led to upheaval, with significant risks for investors and for real wealth preservation.
For Rothschild Wealth Management, the combination of geopolitical instability, market complacence, growing inequality, and high asset prices points to trouble in the future even if they can’t predict exactly what form it will take. The fund argues that having cash on hand during the next market crash will be worth more than chasing returns right now.
Rothschild still favors stocks over other asset classes
Among non-cash assets, the August edition of Rothschild Market Perspectives explains that equities are still the most attractive asset class as high liquidity and low interest rates continue to offer market support. Rothschild is avoiding long-maturity nominal bonds, as are most people at this point, and using a mix of gold, real-estate, and inflation-linked bonds to hedge against inflation.
It’s also hedging against a double dip recession with allocations to hedge funds that are preparing for a bear market and out-of-the-money put options against equity indices.