The performance of a portfolio depends:

• 85 to 90% on asset allocation choices.

• 10 to 15% on the quality of the manager (equity fund, bond portfolio…) or the choice of a particular security.

Asset allocation consists of investing the portfolio across asset classes (equities, bonds, alternative management, money market, commodities, real estate and private equity). Each asset class is assigned a risk level. The asset allocation must be matched to the profile of each client and to a given economic and financial environment.

Within the same class, the allocation in terms of geographic zone, sector and capitalization is also important: for example, European, American or emerging equities; banking, technology or pharmaceutical sectors; large, medium or small capitalization (a compromise between liquidity and growth).

For an asset allocation to be suited to the environment, one needs international expertise in all asset classes, strong convictions, no conflict of interest (i.e. the advisor’s remuneration is not affected by the composition of the portfolio) and no particular bias for one class or another.

An asset allocation is above all built on a foundation of fundamentals with room to maneuver to protect against or take advantage of market emotions. It must be adapted to the anticipated evolution of the environment.

We do not support a commonly accepted asset allocation of 60% equities and 40% bonds in 2022. We prefer a fully flexible allocation based on our macroeconomic and strategic analysis.

Current situation, our recommendation

In December 2021, the dominant strategy among investors was overweight equities (averaging 75% when the S&P 500 was near 4,700 points). This strategy was based on the following analysis:

1) Inflation would be temporary and the Fed would be able to control it easily and quickly,

2) Corporate margins and profits would still be growing strongly in 2022.

Unfortunately for these investors, the first part of this analysis proved to be wrong because inflation remains high. We believe that the inflation peak will not be reached until the end of the year. And it is clear that central banks as a whole have changed their rhetoric on inflation and have started an aggressive rate hike cycle that should last until 2023.

For our part, we advised our clients to adjust their portfolios and reduce the equity portion as of November 2021 to increase liquidity.

In the same way, our caution for the last few months of this year is based on our concern about the stability of corporate margins in the coming quarters and the risk of stagflation in Europe and even the United States. Hence our continued cautious recommendation for the end of the year with an average recommended equity exposure of 30/35, mainly in the US market, while leaving a large portion for cash.