I. In your opinion, what is the most important macro-economic data at the close of this
first half 2018?

In the last two years, we’ve seen a global economic upswing. Today, we need to ask how long this upswing will last on different continents and what the consequences may be for financial markets.

Central banks have decided to curb the liquidity injected into the system since the 2008 crisis, following ten years of particularly exceptional monetary policy.

The principle areas of concern are: trade conflict between the U.S. and the rest of the world, policy shifts at central banks (U.S. interest rate hikes by the Federal Reserve and the phasing out of the ECB’s highly accommodating monetary policy), doubts regarding European cohesion (as seen with elections in Italy), the colossal debt of most countries…

II. One question is on everybody’s mind: are Donald Trump’s policy decisions driving the world to disaster?

We won’t have a definite answer to that question before the end of his first, or – who knows – second mandate!
It’s better to not assume. Public opinion in Europe tends to be rational and criticise what looks like uncontrollable – and therefore dangerous – behaviour. We shouldn’t exclude the possibility that the current American president could obtain a majority in the House of Representatives in November, particularly thanks to his protectionist policy.

Meanwhile, growth in the U.S. continues at a faster rate than in Europe (around 3% versus 2). Concerning stock markets, our Vanguard Opportunities fund, to which we’ve been committed for many years, finished this half-year up by 10% . Similarly, the H20 Multibonds fund we mentioned in our first-quarter letter, which had generated a 12% return as of 31 March, finished this half-year up by nearly 20%.

Concerning the ‘trade war’ triggered by President Trump a few weeks ago, we initially observed bilateral consequences for the U.S. and China; however, it became quickly apparent that Europe and Latin America were amply affected as well.

Within the U.S., Donald Trump may have underestimated the risk of retaliation on the American farming sector, which relies heavily on exports.

III. Let’s talk about emerging markets:

Effects came swiftly: the MSCI Emerging Markets Index fell 8.5% in H1. Among the most affected countries, markets in the Philippines fell 24%; those in South Africa, Brazil and Indonesia fell by approximately 20%, and those in China – the Shanghai Composite Index and SZSE Component Index – fell 14% and 17.5% respectively.

After a systematic presence on emerging markets in 2017, we anticipated this slump insofar as we only invested in emerging assets. We then disposed of nearly all these shares, while conserving a very small investment in the Indian market on the basis that, in the long term, the country is sure to perform well – particularly in Mid- and Small-Caps.

Contrary to advice given by analysts, international investors turned to American assets based on a dollar increase since February of nearly 7% compared to most currencies. The Yuan, for example, fell by around 6% from mid-April, based on experts considering that Beijing could use competitive devaluation as a weapon against the import taxes the U.S. will soon levy on Chinese products.

That being said, if emerging markets lose an additional 10%, we won’t think twice about investing at least 5% in high-quality emerging fund portfolios.

IV. What is your take on the increasingly popular approach of active, rather than passive portfolio management?

Given that we don’t manage in-house funds, my answer is completely objective: we have no reason to prefer an active over a passive, or index, management approach.

That being said, we do not feel the same enthusiasm currently seen for passive management. Contrary to certain data, nearly all of the funds we have selected
over the years have consistently outperformed indexes – in the short AND very long term. When this isn’t the case, we transfer the fund.

One example: in 2017, out of more than 6,000 active funds domiciled in Europe, representing a sum of €1.4 trillion in 23 different spheres, 44% of active funds outperformed their reference indexes (according to Lyxor Asset Management’s annual “Analysing active and passive fund performance” study).

Our approach to fund assessment, combined with direct and frequent contact with managers, helps us better determine overall allocation strategy. The same applies to securities management, thanks to direct dialogue with companies and managers at annual general meetings and, naturally, throughout the year as well.

V. In view of investor concerns and market turmoil, do you feel that investments in shares should be trimmed down?

I don’t see a euphoric future for markets in the second half, and risk assessments may disturb markets, creating volatility. Interestingly, though it appears that political events haven’t influenced markets for several years now, investors often react harshly to geopolitical risks – one example is the Italian debt crisis.

Nevertheless, world growth is steady, albeit at a slower pace. Interest rates remain low. Inflation – as we have predicted several years running – is well under control. To date, this rise in inflation is mainly due to an upward shift in oil prices, and companies continue to perform well.

Caution led us to put in place a few liquidity pockets in order to benefit from any market losses – this summer, for example – and re-invest in companies or equity funds in which activity and performance are always positive over the long
term.
If the dollar reaches 1.10 on the euro, major European products will offer additional potential.
Holding onto major assets, selected on a long-term basis, or, where possible opting for stock picking and equity compartment mobility allows investors to seize on those few basis points which, in the current context, make all the difference.
Holding onto liquidities is a form of management. The risk-reward ratio on bonds has deteriorated, so we prefer liquidities to bonds – by far.
Lastly, compared to H1, we have reduced Mid and Small allocations in Europe in favour of larger capitalisations.

VI. It looks like the traditional model of an equal share/bond split is no longer the best option. What do you recommend?

As we suggested last quarter, priority should be given to new asset classes, including:

• A return to alternative management, particularly as it applies to long and short positions.
• We looked into corporate bond investments with interesting returns (8% annually over two years) offered by high-quality corporate issuers. Such issuers often operate in the real estate sector: student residences, healthcare facilities, and subsidised housing are now included in our strategies.
• Among alternative asset classes, private equity continues to perform splendidly, with increasingly modern processes.
  We’ll discuss our research and recommendations in this area in a future letter.