#WellSaid

The Wellington Blog — A diverse marketplace of ideas, where our investment professionals share and challenge each other’s views. They decide independently how to draw on those ideas to sharpen their investment decisions, unconstrained by any single “house view.”

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Investing in the metaverse

The growing excitement for the metaverse is powered by its incredible potential applications and the tremendous value they could create. But importantly, the technology enabling this seemingly magical innovation is still in development. What some overlook is that the biggest bottleneck today is not software or imagination — but rather the necessary upgrades to the metaverse’s foundational hardware infrastructure. This could create massive investment opportunities…

MARKETS
THEMES
Yash Patodia
Yash Patodia
Global Industry Analyst

Many investors want to be more long-term oriented — and most should be, at least according to longstanding conventional wisdom. But as we found in a recent survey, there are numerous obstacles to consistently maintaining a long-term focus, with market volatility, manager performance, corporate board pressures, and potential career risk topping the list. After all, short-term bouts of underperformance are all but inevitable when pursuing a long-term investment approach (Figure 1).

With all that in mind, I recently tackled three related questions:

  1. What exactly does it mean to be a “long-term” investor?
  2. Are there advantages to being more long-term focused?
  3. How can you identify a truly long-term-oriented…
MARKETS
Adam Berger
Adam Berger
CFA
Multi-Asset Strategist
Boston

The fixed income market dislocations triggered by the onset of the COVID-19 pandemic left active portfolio managers with extraordinary opportunities to generate alpha not seen since the 2008 global financial crisis. Accordingly, many are well ahead of their benchmarks since COVID: The percentage of active core bond-plus and global aggregate bond strategies besting their benchmarks has spiked sharply to over 80% and 90%, respectively.1 Many fixed income allocators have, of course, benefited mightily from this recent spurt of active manager outperformance.

On the surface, there doesn’t seem to be a problem here, right? However, a closer look at this “golden era” of excess returns reveals potential structural manager biases and stylistic tilts that most investors may not expect, or necessarily want, from their fixed income allocation. These risk factor leanings have enabled many active managers to…

MARKETS
Brendan Fludder
Brendan Fludder
CFA
Research Manager
Boston
Carlos Coutinho
Carlos Coutinho
CFA
Solutions Portfolio Manager
Boston
Noah Comen
Noah Comen
CFA
Investment Strategy Analyst
Boston

Every quarter, the Wisdom of Wellington team surveys around 100 of our Wellington colleagues across different investment disciplines and locations to get their views on what we see as the key macro questions of the day. The results can pinpoint where the firm’s views differ from the consensus and can also reveal important shifts in our collective thinking.

The latest survey shows that, while the risk of a US recession is still considered low by historical standards, the probability of stagflation has increased. In our previous survey, 50% of participants noted the risk of a significant upside surprise in US inflation, but that figure has now risen to 63% (Figure 1).

FIGURE 1

The probablity % of a significant US inflation surprise has increased
At the same time, our respondents thought the economic cycle was…

MACRO
Benjamin Cooper
Ben Cooper
CFA
Multi-Asset Strategist
London
Juhi Dhawan headshot
Juhi Dhawan
PhD
Macro Strategist
Boston

The US Federal Reserve’s (Fed’s) message on inflation has changed. Fed Chair Jerome Powell recently characterized supply shocks, bottlenecks, and disruptions as “frustrating” and as “holding up inflation longer than we had thought.” The Fed’s mea culpa is small consolation for investors whose portfolios have not been positioned optimally for a longer-than-expected period of higher inflation.

The question now is: Has inflation already peaked? The short answer is no, in my opinion.

The systemic nature of supply shocks

Inflation is being pushed higher by three catalysts — labor, raw materials, and transportation — that are interrelated in ways that…

MACRO
THEMES
Nanette Abuhoff Jacobson
Nanette Abuhoff Jacobson
Global Investment and Multi-Asset Strategist
Boston
  • 40% of the world lives within 100 km of a coast.1
  • 110 million people live below high tide level; by 2100, that number will be 190 million.

Sea-level rise (SLR) is the climate risk that perhaps most captures the imagination. Pop culture has long depicted doomsday scenarios of ocean inundation and, increasingly, real-life disasters like 2012’s Hurricane Sandy and chronic flooding in coastal cities from Bangkok to Miami have turned fiction into reality.

Rising sea levels: Flooded New Jersey roller coaster

Coastal regions face risks of sea-level change

Thankfully, climate models show most catastrophic impacts of SLR to be far off, relevant for the end of this century and beyond. However, given the extreme risks that even minor changes in SLR pose, we expect spending on adaptation to…

SUSTAINABILITY
Xie Jenny
Jenny Xie
Climate Physical Risk Analyst
Boston

In my October blog post, A firsthand look at Brazil’s straitjacket, I painted a rather grim portrait of Brazil’s macroeconomic landscape following my latest visit to South America’s most populous nation. The “straitjacket” metaphor arose from my sense that Brazil may be increasingly hemmed in by its elevated rates of inflation — the heaviest “tax” on the poor — along with political uncertainty leading up to its October 2022 presidential election and a host of other country-level challenges.

I still believe that. But despite my downbeat macro outlook, as an emerging markets equity investor, I think there is a decidedly more positive side to Brazil’s story. After meeting with 22 of the country’s corporate CEOs, some of whom chatted with me for more than an hour, I came away more convinced than ever that Brazil offers plenty of stock- and industry-specific investment opportunities. You just have to…

MARKETS
THEMES
Jamie Rice
Jamie Rice
CFA
Equity Portfolio Manager
Boston

Most people who visit Japan for the first time come back raving about just how “clean” it is compared to other countries – which, in my view, makes it somewhat ironic that Japan has never really been considered a fertile hunting ground for investors looking for “clean” (environmentally-friendly) companies. But that doesn’t mean that such companies don’t exist here. On the contrary, we have found (and continue to find) great numbers of them; it simply takes some time and effort to identify and properly understand them.

A multitude of factors go into that search and vetting process, but as an investment team focused primarily on smaller companies operating in niche markets internationally, we see Japan as a land of hidden environmental, social, and governance (ESG) gems.

Lingering assumptions about Japan

At both the government and corporate levels, many observers have characterized Japan as a country that is slow to change and adapt to the times. That perception rings true to some degree with regard to ESG, particularly on the…

MARKETS
SUSTAINABILITY
Penn Bowers
Penn Bowers
CFA
Equity Research Analyst
Tokyo
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