As we move on to the final throes of the year the focus across global markets is increasingly on the trade-off between inflation and growth. In this Investment Insight, we outline the key themes that we believe will test markets and drive client portfolios in 2022. Inflation abounds Inflationary pressures remain stickier than many had believed. The United States Consumer Price Index (CPI), a key measure of inflation, rose to 6.8% in November and core CPI increased to 4.9%, a 30-year high. With inflation clearly more persistent than many had anticipated, a clear theme for 2022 is tightening financial conditions i.e. increasing interest rates. Global financial conditions remain extremely loose. Indeed, higher actual and expected inflation has kept real interest rates in many countries deeply negative. This naturally encourages investors to move further out on the risk spectrum. This will change in the coming year. Over the last month, the United States Federal Re...

Over recent weeks I have found myself wondering how many letters there are in the Greek alphabet. The answer is twenty-four and it turns out Omicron is the fifteenth letter. It is of course Greek letters that are assigned to COVID-19 variants as they emerge. It was news of this latest variant, Omicron, that has contributed to recent Global share market volatility. I like to finish my columns for the year with a light-hearted article in December, but it seems the Greeks have disrupted my plans. Investment markets have been 'climbing a wall of worry' as the spectre of a new variant that could require further lockdowns plays on investors' minds. To qualify as a correction, a share market must fall by 10% or greater. I have lost count of the number of market corrections that I have observed alongside my clients. My observation is that, in retrospect, there is a sameness about all of them, but in the heat of the moment they all feel very different. The sameness ...

As inflation and interest rates increase, bond portfolios have experienced volatility. Although market uncertainty can be challenging, it does present opportunities for investors. In this Investment Insight we are going to step back and discuss what determines the return investors receive from a bond. A bond is the same as any other asset in that its return is comprised of two components – the income it generates and the capital value of that asset. The first of these is simple to determine – the income you receive from a bond is the (typically fixed) coupon that a bond pays quarterly or semi-annually. It is the capital value of a bond that may lead to confusion. Its value can move in a way that is not initially obvious. A good way to describe the change in capital value is to use property as a comparison, as this is an asset class most people are familiar with. As well as being something we can own, a property can generate income through rent...

Investment performance update During the financial market rebound, NZ Funds acquired several positions which we expected to benefit from the world returning to normal. As the market rebounded these paid off and generated above index returns for the year ended 31 December 2020. Gains continued into 2021 with one of the strongest starts to the year NZ Funds has seen. However, from 1 April onwards positions became more volatile. This volatility led to most Portfolios giving up their gains from earlier in the year. While we have retained the capital gain over the index for 2020, to align the Portfolios more closely to their benchmark for the remainder of 2021, and for 2022, we have substantially reduced risk, acknowledging the current uncertainty around interest rates and Omicron. We remain strongly of the view that a well-diversified portfolio, which contains assets which profit from rising inflation and interest rates, will be more resilient throu...

"As we discussed two weeks ago in our Investment Insight about Allbirds , we’re always looking for opportunities to buy shares in innovative companies at the IPO stage. This is why we’ve just invested in Iris Energy’s IPO on the NASDAQ. Iris Energy is a Bitcoin mining company with a difference: it uses only renewable energy to power its mining operations. "The total size of the Bitcoin mining industry in 2021 is estimated to be US$16bn, with significant scope for growth in the coming years. Iris Energy represents an important and necessary step forward for this industry: a future where crypto mining operations can make a meaningful difference to carbon emissions and to the communities they operate in..." Read more about Bitcoin's energy consumption and the investment case for Iris Energy below.

I wonder where we would be without acronyms; probably using more ink but perhaps better informed. The acronym of the moment has been, of course, COP26 – the trendy acronym for the United Nations (UN) climate change conference, recently held in Glasgow. It was the 26th annual UN 'Conference of Parties' which began in Berlin in 1995. In simple terms. the purpose of the series of conferences has been to collectively agree on the actions required to limit the impact of climate change. Cynics have suggested that the empty promises resulting from past conferences have exacerbated, rather than reduced, the 'hot air' problem. However, in the wake of the global and existential threat that is COVID-19, the global community is awakening to the reality that a collective response is the only way to deal with a truly global threat. Retreating to 'your corner' when you live on a sphere doesn't really work! The Glasgow conference set a number of objectives, but it i...

"At NZ Funds, we have a modern, diversified approach to investing. Diversification is one of the key tenets of finance. It improves risk-adjusted returns over time and is often referred to as the only ‘free lunch’ in financial markets. Put differently, the inability to diversify leads to inferior risk-adjusted returns. "We take this approach so we can find long-term growth for our clients, wherever it may be in financial markets. But it is also about preserving as much of our clients’ capital as possible, especially when markets in traditional asset classes go through big cyclical shifts. This is exactly what we’re currently witnessing in global bond markets with the rise in interest rates and inflation. We use futures contracts to manage this shift..." Read the full story about why bond markets are falling and are expected to fall further below.