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Investing Amid Stagflation: US Wealth Managers' Perspectives

Tom Burroughes

28 May 2022

Holding cash may appear an easy call in volatile markets but could be a big loser for investors, while the toughest task is to find an alternative source of portfolio “ballast” to fixed income when yields are on the floor.

These are some of the views of family office and wealth management figures in the US who, like their peers, are dealing with “stagflation” – rising inflation and a shrinking economy. Yesterday, official US data showed that gross domestic product in the first quarter contracted by an annualized 1.4 per cent. In March, US consumer price inflation came in at 8.5 per cent from a year ago. 

A decade of ultra-loose US monetary policy – only now starting to change – plus supply-chain disruptions because of the pandemic, the Russian invasion of Ukraine and pent-up spending unleashed following the end of lockdowns have created an inflation perfect storm. And many of the asset allocation assumptions guiding wealth managers for more than a decade have had to be reconsidered. 

“The uncertainty this has caused for the typical high net worth investor, with no clear safe haven for their investments, has provoked many to simply move to cash, which could end up being a brilliant decision or a very bad mistake,” Kevin Swanson, CEO of Potentia Wealth in San Jose, California, told this news service.

“In the search for higher yield and lower duration and income funds, investors are taking on significantly more risk. As the Ukrainian conflict continues to expand through global sanctions and increasing support by NATO countries of Ukraine, we continue to see an increasing possibility of a recession soon. If this occurs, those higher risk income investments could become some of the most volatile investments in clients' portfolios,” Swanson said. 

Michael Wagner, co-founder of Omnia Family Wealth in Aventura, based in Florida, thinks many high net worth investors have sufficient experience and understanding not to panic.

“I think and hope that HNW people are at least somewhat prepared for this. It is a generalization, but HNW and ultra-HNW investors typically have more investing experience or access to professionals with that experience. Those that have the benefit of experience in markets are very familiar with the multi-decade cycles exhibited by inflation and interest rates. Many have speculated for a decade or more that we would see a return to a rising interest rate environment. The prolonged uptick in inflation that we’re seeing may have come as more of a surprise, though there were some red and yellow flags as the pandemic set in,” Wagner said.

High-quality bonds have in the past been important ballast in portfolios, shielding capital from the impact of a sharp fall in equities. But after a decade of thin yields, bond markets don’t provide much cover. 

“This is the biggest challenge in allocating capital today. Traditional fixed income is more likely to act as a millstone than a ballast in a rising rate environment. At the very least, look for floating-rate bond exposure if you must stay liquid. We have increasingly looked to low-beta hedge funds and private debt to provide some portfolio stability in times of change and crisis,” Wagner said. 

“We are constantly peer reviewing prospect portfolios – and simply stated, we do not believe the average HNW portfolio is appropriately allocated for today’s changing macro environment,” Dick Pfister, CEO of AlphaCore Wealth Advisory in La Jolla, California, said. 

“Consider where most of the returns were generated for the average HNW client over the last decade plus – this was largely sourced from long only equities, and in particular, growth and tech focused exposures. Layer on tax considerations , and what we often observe is a heavy overweight to US large and mega cap growth allocations,” he said. 

Big Tech and the rest
Recent weeks have been tough for Big Tech stocks such as Netflix, with a period of rapid growth during the pandemic, when people were confined at home, easing off as lockdowns ended and intense price competition kicked in. The dramatic drop in the Netflix share price is probably the most stark example of how quickly fortunes have changed. In the past few days, Tesla/SpaceX tycoon Elon Musk has stunned markets by his purchase of social media giant Twitter.

“Big Tech, which typically falls into the large-cap growth sector, has been beaten down in the stock market since the end of 2021. Subscription services aside, corporate revenues and profits for Big Tech continue to be strong and support a higher valuation than we are currently seeing in the stock market,” Swanson said. “After digging into the fundamentals for some of these large tech companies, I think we will find that there are some good deals in the stock market right now. It may not be the right time to hold a broad market index in the sector though.  

“We also see some good values as we move down the market spectrum into small cap companies. Again, after digging into the fundamentals to make sure that we have financially strong companies, we are also looking to long-term returns from small cap investments,” he said.


Pfister said it is easy to see how the situation of Big Tech can turn so quickly with so much positive news having been discounted months ago.

“Netflix is an example of a market darling that was priced for perfection – it only took the smallest of subscriber growth declines to impact the stock price negatively in a meaningful way,” Pfister said. “This isn’t to say that we are outright bearish on equities – we look at the universe of global stocks as objectively as we can and do see opportunities. Today, the data shows that the equity risk premium currently stands at one of the lowest levels of the last decade given the strong upward move in 10-year Treasury yields over the past few months,” he said.

“Furthermore, valuation spreads within sectors and indices are still near historic highs. When you look at the market through this lens, we are large proponents of stock selection and active risk taking today, and, in a long-short format. A long way of saying, yes, investors ought to move risk budget away from the mega caps and take advantage of breadth in the overall market; there is an immense amount of repricing that is going on as interest rates and real yields un-anchor from artificially low levels,” he said.

Wagner said the markets are certainly volatile now.

“When it comes to equity investing, especially in the US markets, we tend to advocate for an all-cap indexed approach. Broadly speaking, we’re seeing a return of volatility to the equity market. The firms that most consumers are familiar with have expanded beyond the GEs and P&Gs to your FAANGs. These names are widely held and easily pulled levers for individual investors looking to de-risk. If you look at the trailing three-, five-, or 10-year returns for the tech sector, returns are still beyond historical averages,” Wagner said. 

“My biggest concern today revolves around less-experienced investors who may have done very well over the past five to 10 years in highly speculative markets . Years of positive returns breeds comfort, and I fear an over-allocation to these hyped-up sectors. History has shown that when a speculative market collapses, it is often the least-informed left holding the bag. Wealth can be built through concentration but is kept through diversification,” he said.

Asked what investors do when bonds don’t give much capital protection, Pfister said there are plenty of tools left to be used.

“For several years now, AlphaCore has stayed meaningfully underweight core bond-like products, staying very light on anything with much duration for that matter. Like our views on overall equity markets, bonds by almost any measure are the richest they’ve ever been,” he said.

“Recognizing that bonds would lose much of their diversification benefits at such low yields, we have been big proponents of alternative strategies and asset classes,” he said. “Private credit has offered the yield component that was missing from bonds. Hedge funds that manage structured credit strategies also offer active rate hedging overlays that have been incredibly additive in a year like 2022. Managed futures and trend following strategies have been a very nice diversifier for our portfolios as well, providing the ballast against equity volatility – something fixed income has not been able to deliver on in this new regime.”

“Our industry in the last several years has been floating around the acronym 'TINA', which stands for 'there is no alternative' which has often been cited in justifying the heavy purchasing of stocks given the low level of yields in bond markets. We try to keep our investment approach grounded in fundamentals,” he said.

“It’s our view that overreaching and chasing both stocks and bonds at irrational valuations will lead to unfavorable outcomes for investors. We believe the problem with TINA is that it often incites exuberance and blind faith. The solution to investing in a market environment with stretched valuations and irrational behavior is through alternative investments,” Pfister said.

“The first quarter of 2022 highlighted the dangers and vulnerabilities that inflation poses on stocks and bonds, and when long-held correlations break down, there is nowhere to hide. This should be a loud wake up call for advisors that are managing portfolios without diversifying alternative asset classes and strategies,” he added.