Transcript
Tom Merchant:
Hello, and welcome to Saltus’ Q1 investment update. My name’s Tom Merchant. I am a partner and business development manager for Saltus, and I’m delighted to be joined today by David Cooke, our CIO. Afternoon, David.
David Cooke:
Good afternoon, Tom.
Tom Merchant:
Today, David and I, or I should say mostly David, is going to be talking about the events of the last quarter in relation to our portfolios. Taking a bit of a whistle-stop tour, looking at what’s happened in the early parts of the year, leading up to what I suspect a lot of you will be tuning into this to listen about as what’s occurred during March and some of the events, obviously, in the Middle East and how that’s affected portfolios.
We are conscious that these updates are around 15-20 minutes or so, and appreciate there’s a lot of content to get through. So we will be following this up with further information and details around the asset allocation and deeper looks into the situation with constant communication. I would say if you were expecting a dissection of what’s happening in international relations at the moment, we’ll definitely touch upon it, but there’ll be deeper information coming in the weeks to come. Welcome, David.
David Cooke:
Thank you, Tom. Thank you for that intro.
Tom Merchant:
Good. To kick things off, I think maybe should we begin with a bit of a whistle-stop tour of what you and the team were thinking coming into 2026. Because I’m very keen for us to focus on the last month, but I’m also conscious it’d be good to understand how we were looking, what we’ve done when we came into March. Yeah, begin with that, if possible.
David Cooke:
Yeah, that’s a very good idea. What we were thinking was that the last three years have been really, really strong for portfolio and market returns. And we felt that that period was coming to an end. That’s the period of supernormal returns and we’ll get a much more normal, but still positive return environment going forward if you took the next three years plus. And that was mainly a function of valuations have become stretched, particularly in equity markets, and that all the things that had made markets go up in the last three years, such as support of interest rate policy and an awful lot of fiscal stimulus, a lot of liquidity around the system, that was still present going into 2026, but all those positive effects would start to wane as we move through the year and beyond. So just a slow-down in the pace of change or the potential return environment compared to the last three, which was unusual. That was our broad thinking and that was the environment we were positioning for.
Tom Merchant:
Do you mind me interjecting what you said we were positioning for? What does that look like? And I appreciate you saying, “We weren’t expecting necessarily a down market, but a slightly more normal, so not sort of heady double-digit returns that maybe we’ve been experiencing.” Should we touch on that, how does that look like in the portfolio?
David Cooke:
Sure. Since there’s so many different portfolios, I’ll maybe keep it high level, but the simplest way to think about it is, instead of having a period in which there’s a huge dispersion in returns, well, one asset could give you 15% and 20% and another asset would give you five. So there’s quite a lot of things you could do for different risk bands to make a portfolio. We think we’re actually going into an environment where maybe everything’s kind of in and around the same, somewhere between six and eight.
And in that type, as returns come together, don’t hold me to those numbers, just think of the fan becoming a little bit less spread out in terms of potential returns. And in that environment, what we try to do is protect the downside for adverse events. And what we seek is greater diversification. So what you see in portfolios is an awful lot more on geography, geographical diversification across asset classes, diversification across styles, and we allowed then portfolios more use of alternatives and alternative strategies.
Tom Merchant:
Fine. Understood. And did that bear out? Did we have a slow first two months of the year?
David Cooke:
We were probably a little bit too pessimistic because January and February were blockbuster. They’re really, really good months for portfolios and for markets as the lingering effects of all the stimulus and the expectations of further interest rate cuts and just basically momentum just kept portfolio returns across particularly risky assets really, really strong until that was brought to a juddering halt in March by the war in Iran, which resulted in the oil price spiking 45%-ish in a month, which is a huge energy shock, supply shock, which sends a burst of inflation into the global system, which changes the market’s view and where interest rates are going to go. It also acts as a tax on growth, so there aren’t as many profits around. So equity markets don’t really like that. There’s a huge amount of uncertainty over just what the duration of this shock is going to be.
So that’s why it happened. And what happened, I suppose, partially because of the supernormal returns or really strong returns in January and February is that you had a very quick everything-everywhere-at-once sell off as we went through the first few days and weeks of March. As people got over their initial optimism that this was going to be clean and quick and started to realise that actually could be a bit longer and messy, people started to sell more aggressively to protect profits. And what we eventually ended up in very broad terms in experiencing was all the gains of January and February were handed back in March and year-to-date, we are flat, maybe up a percent, down a percent, it depends on the mandate, but still up over 12 months, which had the super strong periods of the last three years, which makes the outlook from here interesting when we’ll get onto that.
Tom Merchant:
We will indeed. So that’s an interesting point. It was a bit of a shock event. I think you were talking to me about Japan earlier when we were looking at sort of… There’s probably a good example of a sector and geography anyway that had unbelievable returns in January, February, but also probably felt it the worst in March, if that’s a fair description.
David Cooke:
Yes, exactly right. Yeah.
Tom Merchant:
Fine. And then in terms of what we’ve done in March, has this been a big enough event? Is it specific enough that there is something that we should have been doing in the portfolios? Has this caused us to make any changes in the short term or, because you mentioned it’s everything all the time at once, is it a case for nothing specifically has had to be altered?
David Cooke:
What we’ve done is, I suppose, what you call a little bit of footwork, but nothing substantial. The reason is that all the risk bands, all the portfolios have behaved exactly as we expected them behave under pressure. The first thing you do, to be 100% honest, when you’re a portfolio manager and the stress comes on, is see if there’s any fires to put out. Something’s gone badly wrong, an investment just isn’t behaving the way you thought it would, and that wasn’t the case. So there’s no fires to put out, which doesn’t mean we didn’t lose money or hand back the profits, but it meant that nothing was cracking. So we started to feel a little bit more tactical or opportunistic, not in a big way because there’s still an awful lot of uncertainty around. So we did a little bit of, what I call, footwork within the portfolios.
There was another thing going on. For example, we bought a few more US equities. That was partly because they were holding up relatively well, but also in the preceding months, some of the big technology names had sharply derated over various concerns about the AI CapEx cycle and what artificial intelligence products could do to various software companies. And it meant that a lot of the hype had come out of that area and we were underweight, so we thought we could bring that back into a more neutral position, so we did something like that. And also some of the positions that we have like in gold mining shares are super volatile. And after enjoying significant profits over the last couple of years, we took the opportunity to maybe just halve those exposures.
And what that does in a portfolio manager’s mind is give a little bit more oxygen to think because you could sit in an investment committee meeting and spend a third of your time talking about a small position that moves around a lot and you just don’t need that active risk taking up so much of the risk budget, especially when it’s in such strong positions of profit. So we have halved that position. And there are a few other things at the edges, but nothing substantive.
Tom Merchant:
Fine. That makes sense. And then I’m not asking you to predict Donald Trump’s next two to three weeks of activity as I appreciate that. I’d say I’m probably better off asking what the lottery numbers are. But looking at maybe two different routes, let’s say. If this does go a lot longer, what do we think the effects are? And then secondly, let’s say it does end, do we think we’re going to see a reversion to how we felt at the beginning of the year? So is it moderate-looking returns or actually are there going to be some longer-lasting effects from this spiky period?
David Cooke:
Well, the good thing, I suppose, if I can use those words, is we’ve seen this before. We’ve specifically seen the effects of oil price shocks from the Ukrainian invasion all the way back through history into the ’70s and supply shocks in general. What eventually happens is that supply changes and increases. There are other parts of the world that it says that you don’t get the Middle East oil out for a long period. Other parts of the world will start to produce more and supply more and demand will fall for energy as economies slow and you’ll get a point at which the crisis is matched in price, the effect is absorbed. But that journey, if we’re matching reduced supply with reduced demand can be pretty unpleasant because it effectively can involve some form of a recession or slowdown. But how severe that could be is the guessing game that everybody’s trying to do at the moment.
And what generally we think will happen, and what consensus thinks will happen, is the longer this goes on, the more pain there is caused to too many people, too many countries, including the competence, which ultimately acts to bring around some form of resolution. And that’s usually because energy price has got a very quick knock-on effect into economies that usually comes pretty quickly, by which I mean a period of weeks and months as opposed to quarters and years. And as we talk at the moment, it looks like, who knows, but we may be heading toward the end game in terms of this conflict. And from that, we’ll be able to measure the effects. And if we take as a central assumption, like the market did, that this is somewhere between a conflict that goes on for weeks and months, one or two, maybe three, then that is an effect that can be absorbed by the global economy in general without sending us into a global recession.
It doesn’t mean it won’t be tough for certain countries and certain places. That means that you could start to look through different markets to try and find opportunities for those assets that are repriced too much. So that’s a general broad brush feeling on outlook at this point.
Tom Merchant:
Fine. So we are cautious, but also looking for opportunities rather than cautiously optimistic.
David Cooke:
Exactly. Opportunities and threats to portfolios are two sides of the same coin and March is all about threat, threat, threat, but at some point the coin will flip into opportunity, opportunity. And we’ll think we’re approaching that flipping point, if you’d like. And I’d also say that wars are particularly nasty, but we’ve had an awful lot of shocks, quote unquote, to world investment markets over the last few years. We’ve had a plague, we’ve had the entire global trading infrastructure being upended as well.
We’ve had lots of things going on and the global economy and portfolios that are correctly positioned have been pretty resilient. So we are in a time where it is more threatening than opportunistic, but the lessons from history, if you put it that way, is that at some point you should keep your eyes and ears open for the opportunities in our humble opinion was not really doing anything aggressively at this point as we’re approaching the point where the opportunities start to outnumber the threats.
Tom Merchant:
Yeah. And I suppose it’s been a pretty accelerated period of history, isn’t it? That the investment team that you’re overseeing has obviously experienced lots of these shocks that you would normally expect to be over, a lot bigger timeframe than the last five or six years that we’ve had them. So yeah, I suppose that’s really positive to think about and keep me feeling a bit more assured.
David Cooke:
Well, I was going to say, the analogy, I suppose, it’s coming to the end of ski season. I’d use a skiing analogy. When you ski in bad weather, you know you’re going to hit a bump. You don’t know when though or how big it’s going to be, so you ski soft. And that’s kind of how you do portfolio management as well, particularly in this environment post-COVID. And we do that through having really, really, as far as we can, diversified portfolios that helps us absorb the shocks, keeps us intact, and then puts us on the front foot to take advantage of any opportunities. And there’s a couple starting to show up at the minute, but nothing where we would really aggressively move.
Tom Merchant:
Perfect. Brilliant. Well, listen, thank you, David. That’s a really helpful summary. And just to reiterate my point from earlier, we will be putting out some more comms on this, especially through the CEO’s picks. And obviously, please head to the website to the Insight section on the investment page as David and the team are putting up regular updates, which I know a lot of you read. And also, if you are a client of Saltus, please pick up the phone.
Your advisers, you’ve probably been speaking or emailing quite regularly heading towards tax year-end, but once the tax bits out of the way, if you would like to speak to them, that’s what they’re here for. We love hearing from you. And obviously, from our position, it’s a great example for us to be able to talk to you in these trying times, if that’s how you feel, and give you some reassurance, which is obviously our key goal. I suppose for me, it’s just to say thank you, David, very much for your time. I appreciate your insights as always.
David Cooke:
My pleasure. See you again next quarter.
Tom Merchant:
Exactly. And for me, thank you again for all listening and then hopefully speak to some of you soon. Thanks. Bye-bye.
David Cooke:
Bye-bye.
