Portfolio Mix Q4/2009: Managing the Upcoming Reconciliation

As the global economy moves into bottoming out over mid 2009 and potential recovery to more normality into 2011, but with currently still ongoing credit duress, we have thematically encapsulated portfolio mix challenges as those of Managing the Upcoming Reconciliation. The capital market reconciliation required is amongst equities, fixed income and massive deficits. In contrast, that at the end of Q2/2009 was Expansion of Restructuring Theme (note of June 30,2009) to encapsulate long duration changes in business practices, that at the end of Q1/2009 was Visualizing Beyond the Abyss (note of March 30,2009) to encapsulate looking beyond then stiff cross currents and much further back but still relevant today, at the end of Q3/2007 being Cross Linkages Crucial (note of September 27,2007) to encapsulate excess complacency and hence need for elevated risk watch.
 
We see the present cycle as one in which the continuum of change for the markets is still a work in progress on the rapidity of growth and the implications of massive deficits and flexibility in exit strategies. As a result, versus our asset mix at a similar point in the last cycle at Q4/2002 when our cash weighting was down to 2%, our cash currently is down from at peak of 15% in Q3/2007 but still 12%. However, we have reduced fixed income 2% (to now 22% in U.S. and 27% in Global mix) in order to add to gold bullion/precious materials in other assets as hedge against fat tail risk at both ends. The mix of deficits and assuaging credit indicates a decline of flexibility for many advanced economies.

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