Investment philosophy

Asset class correlations are very difficult to predict, and recent history suggests a tendency for them to rise in a crisis. Monthly returns over the past decade have been highly correlated between equity and property, and moderately correlated between bonds and gold. In the longer term, each of these classes displays performance characteristics that vary with the circumstances, although it is possible to observe that equity and property tend towards higher long-term gains, while money (bonds and cash) and gold offer short-term stability. Both of these considerations are important if the global dollar is to be both a competitive store of financial value and a reliable medium of exchange.

It should be noted that volatility is traditionally measured relative to conventional fiat money, which is itself just one class of financial asset. Bonds are denominated in national currencies, and appear relatively stable measured against them, but the value of a debt depends partly on the value of the currency in which it is paid. This is even more directly the case for cash holdings. While stability relative to money is a useful characteristic, the global dollar should demonstrate a tendency to minimise several kinds of volatility. Each asset class is perfectly correlated with itself and only itself, so that stability against that asset depends mainly on its share of the portfolio.

General expectations for a balanced and diversified portfolio are difficult to assess with any accuracy. In reality there will be a wide range of such expectations, but it is possible to construct performance characteristics that are within the tolerances of most. While aiming for a convergence of preferences for a ‘neutral’ financial position, the objective is acceptance rather than optimisation. A strategy that is simple and understandable to the widest possible customer base is essential to achieving this acceptance.

Balancing evenly between the major asset classes is easily understood; therefore money, equity, and property each constitute 30% of the portfolio. Gold is another important asset that traditionally serves to stabilise a portfolio, but at the cost of lower long-term returns. Gold therefore makes sense in the context of a financially stable monetary unit, but only to a point. It therefore makes up the remaining 10% of the portfolio. Existing ETFs provide a reasonable proxy for customer preferences within each asset class.