Safety First in the Face of Russian Strikes
Russia’s invasion of Ukraine strikes us as one of the most-expected unexpected events of recent times. Forged by his own sense of destiny and steeped in a revisionist ideal of Russian identity, President Putin has executed a decidedly aggressive change of course, rattling the cage of the current world order. In hindsight, it is difficult to feign surprise at this outcome.
As stewards of investors’ long-term savings, it is not our duty to form, nor pass, judgment on the merits of political and geopolitical events. As Henry Kissinger said, “It is not a matter of what is true that counts, but a matter of what is perceived to be true.” We must therefore treat everything we hear and read with utmost caution. And although hope cannot ever be an investment strategy, as human beings we unashamedly share in the ideals of negotiation and peaceful resolution to conflict. As such, the human cost that will inevitably follow this latest display of “big man politics” disturbs and saddens us.
Investors rightly expect fund managers to judiciously manage the myriad investment risks in their investment funds. We have for some time flagged escalating geopolitical risks, ranging from the US–China trade wars, Brexit, the China/Taiwan conundrum, Russian insecurities over NATO expansion, ongoing conflict in the Middle East and general schizophrenia in the EU. Indeed, we even flag the alarming internal political divide in the US as having potentially global geopolitical consequences. These dynamics are in fact intricately connected.
If there is any positive to the outbreak of conventional warfare in Europe for Foord investors, it is that the Foord funds are well positioned for the consequences of just such an escalation. And while a firm grasp of lurking geopolitical risks is essential to our investment philosophy, it is a notoriously difficult pillar around which to build an investment strategy because the potential outcomes are usually binary. As such, they factor in our thinking at the margin, after we have considered the fundamentals of the investment landscape.
We have clearly expressed our views on the risks of structurally higher inflation, rising interest rates and lofty asset class valuations. This latest geopolitical shock comes before many of these fundamental economic and financial risks could fully manifest. As safety-first managers, it emboldens our high-conviction sense of caution and focus on capital preservation. Notably, the conservative Foord International Fund has gained 2% in US dollars in 2022, compared to the 10% decline of developed market share bourses. The Foord Global Equity Fund has declined only 6% at the time of writing.
The Foord funds have no direct exposure to Russia or to the region. Global financial and energy markets have already responded to the consequences of war in Europe. The Foord portfolios have a good amount of hedging to these outcomes, depending on their specific risk mandates. It is the indirect, incremental uncertainty quotient of major geopolitical conflict that interests us more. And while unexpected risk events are psychologically uncomfortable for investors, Foord’s portfolio managers relish the opportunities that the concomitant market volatility usually dishes up. This is where we are concentrating our minds.