Jensen is back with another commentary that this month comes via Claus Vistesen (never read Claus before but makes a good first impression with this post). Jensen lays out some similar thoughts about why he thinks the equity market will continue to have a bumpy ride to nowhere and why he has changed his mind about higher interest rates, now joining the deflation camp which if correct would mean lower interest rates. The leads him to think a heavy weighting to absolute return products is the way to go; do note the name of his firm.
Jensen in discussing deflation and so lower interest rates mostly makes the same argument that a lot of other folks make and by now you've read about this and you likely lean one way or the other (inflation or deflation) but Jensen adds one other nugget that I found to be very compelling that I have not read anywhere else;
The inescapable conclusion is that when you need inflation the most, it is the hardest to engineer whereas, when you don’t want it, you can have it in spades.
And Japan saga as support for the argument makes the comment all the more interesting. My thought all along here has been that we have clearly had an asset deflation and that deleveraging was never going to wrap up in six months but that longer term the supply of debt that needs to be issued will be inflationary. I can't say I've ever had 100% conviction with this but it is what I believe. The unique spin that Jensen puts on it though is compelling. I am not changing my mind at this point but am maybe more open to the idea of deflation than before.
He also articulates several other reasons why he thinks equities will struggle and then makes the case for allocating "30-40% to uncorrelated asset classes" like absolute return.
The average investor is over-exposed to equities right now. I would consider myself extremely lucky if my equity portfolio were to deliver more than a 5% annualised return over the next 5-10 years.
I've been writing about and using absolute return in client portfolios for a while now but nowhere near 30-40%. At one point we had 5% and now it is more like 2%. When the market was cratering there were quite a few comments wondering whether it made sense to go very heavy into absolute with the idea being that equities are broken. My answer was pretty consistent which was that the time to consider such a thing is not after the market cuts in half.
Now that the market is up 75% it would be more reasonable to consider increasing exposure to absolute return funds. As Jensen notes there were plenty of absolute return funds that "did not work" during the 2008 decline and whatever or whenever the next panic there can be no guarantee that they will work then. So the risk is you go up less than the market but capture too much of the ride down. That sort of outcome would be disastrous.
Having some exposure; yes, go for it. But a huge exposure in the belief that equity markets are broken was a mistake a year ago (I made this point then) and would be a mistake now. I believe the task of capturing a normal equity return requires a willingness to make specific country decisions but of course that was the case last decade too. Absolute could easily help smooth out the ride but too much of anything is risky.