Category Archives: Rivers Capital Management Insights

Our monthly reports offer news and industry insights from the Rivers Capital Management team

Consumer Duty Requirements






Consumer Duty: Consumer Duty Information for Distributors

Rivers Model Portfolios available on platform

Assessment date: October 2026 ·
Data as at 30 September 2026 · Next review: October 2027

1. Purpose and scope

Rivers Capital Management Ltd (RCM, FRN 801238) is the manufacturer of the Rivers Model Portfolio Service (MPS). This document sets out the target market and our annual price and value assessment for each Rivers model portfolio, so that distributors can meet their own Product Governance and Consumer Duty obligations.

It covers six Rivers MPS models available on platform:
Cautious Risk, Balanced Risk, Adventurous Risk, Aggressive Risk, Balanced Income and ESG Balanced.

2. Target market

2.1 Common to all models

•   
Client type: UK retail clients who receive ongoing advice from an FCA-regulated financial adviser. The models are not available on a non-advised or execution-only basis.

•   
Distribution strategy: Advised only. Advisers access the models on Platforms under RCM’s agent-as-client Investment Management Agreement, which sets out each firm’s responsibilities. The adviser assesses suitability, including attitude to risk, capacity for loss and time horizon, and selects the model.

•   
Knowledge and experience: No specific investment knowledge is required, because the client is advised. Clients should understand that the value of their investment can fall as well as rise.

•   
Wrappers: General investment account, ISA, SIPP and Junior ISA, adapted for off-shore bond as appropriate subject to platform’s product range

•   
Investments used: Predominantly UK-authorised and FCA-recognised open-ended funds (OEICs, unit trusts, SICAVs). Exchange-traded funds and commodities are used where they are the most efficient way to hold an exposure, for example physical gold. All holdings are eligible for ISA and pension wrappers – for offshore-bond proxy investments are used as appropriate

2.2 By model

 

Cautious
Risk

Balanced
Risk

Adventurous
Risk

Aggressive
Risk

Balanced
Income

ESG Balanced

Risk profile (RCM mapping to Dynamic Planner / Defaqto 1–10
scale)¹

4 – Low Medium

5 – Medium

6 – High Medium

7 – High

5 – Medium

5 – Medium

Primary need

Modest real growth with
controlled volatility

Moderate long-term growth

Capital growth; accepts
larger fluctuations

High long-term growth

Regular natural income of
c.4% p.a.

Moderate growth, invested
only in ESG-screened funds

Target return (long-term annualised, after fees)

4.5%-6%

5.2%-7.2%

6.0%-8%

7.0%-10%

5.2% (yield >4.0%)

5%-7%

Volatility limit (annualised)

<7%

<9%

<13%

<16%

<9%

<9%

Maximum loss guide (not guaranteed)

<6%

<10%

<15%

<18%

<10%

<10%

Strategic Enhancer (equity-type risk) allocation

40%

55%

74%

83%

55%

55%

Minimum time horizon

4 years

6 years

8 years

10 years

5 years

6 years

Ability to bear losses

Can accept modest short-term
falls

Can accept moderate falls

Can accept significant falls

Can accept large falls and
long recovery periods

Can accept moderate falls;
income may vary

Can accept moderate falls

Not suitable for (negative target market)

Clients needing capital
security or a guaranteed return; horizon <5 years

As Cautious; clients unable
to tolerate falls of c.10%

As Cautious; clients unable
to tolerate falls of c.15%

As Cautious; clients unable
to tolerate equity-market-level falls

Clients needing a fixed or
guaranteed income; clients seeking capital growth above inflation as a
priority

Clients requiring specific
ethical exclusions beyond RCM’s screen, or a product with an FCA
sustainability label

¹ RCM’s own mapping of each model to the 1–10 scale used by Dynamic Planner and Defaqto. It is currently not an independent risk rating.

2.3 Customers with characteristics of vulnerability

The models are designed to be suitable for vulnerable customers within the target market, provided the adviser has taken their circumstances into account. In particular:

•   
Clients drawing an income, including older clients in decumulation, are most exposed to sequence risk. Balanced Income targets natural income, so capital does not need to be sold to pay it, but income and capital values can still fall.

•   
Clients with low financial resilience may be harmed by falls near the maximum loss guide. Advisers should weigh capacity for loss as well as attitude to risk.

•   
We publish factsheets, rebalance notes and commentary in plain English so that advisers can explain changes to clients who need extra support.

We ask distributors to tell us if they identify any group of clients, including vulnerable clients, for whom a model is not delivering the expected outcome.

3. Value assessment

3.1 Approach

For each model we compare the total cost the client pays with the benefits they receive: returns against the model’s target, its peers and inflation; risk against the stated limits; and the quality of service. We do not see platform or adviser charges, so this assessment covers the costs RCM controls or selects.

3.2 Costs

Model

Underlying fund OCF

30/9/2026

Underlying transaction costs (ex-ante)²

RCM DFM charge

(0% VAT)

Total ongoing cost (excl. platform &
adviser)

Cautious Risk

0.44%

0.17%

0.25%

0.86%

Balanced Risk

0.53%

0.18%

0.25%

0.96%

Adventurous Risk

0.55%

0.14%

0.25%

0.94%

Aggressive Risk

0.57%

0.12%

0.25%

0.94%

Balanced Income

0.60%

0.12%

0.25%

0.97%

ESG Balanced

0.60%

0.13%

0.25%

0.98%

² Weighted ex-ante
transaction costs of the underlying funds, as reported by fund managers.
Holdings without reported data (cash and the physical gold ETC, together under
5% of each model) are excluded. All figures are as at 30 September 2026.

RCM charges a single 0.25% p.a. fee. Three underlying funds can charge performance fees (Jupiter Merian Global Equity Absolute Return, Polar Capital Healthcare Opportunities and Algebris Financial Credit). Between 15% and 33% of each model is held in passive funds.

3.3 Performance and risk to 30 September 2026

Model

5 yr ann.

Peer A 5 yr

Peer B 5 yr

10 yr ann.³

Since launch ann. vs target

5 yr vol

Max loss vs guide

Cautious Risk

5.2%

1.9%

3.5%

5.3%

5.8% vs 4.5%

5.5%

-7.7% vs <6%

Balanced Risk

7.0%

3.9%

4.7%

6.9%

7.5% vs 5.2%

6.6%

-10.4% vs <10%

Adventurous Risk

7.0%

5.7%

6.5%

7.4%

8.0% vs 6.0%

8.4%

-10.8% vs <15%

Aggressive Risk

6.8%

10.9%

8.2%

7.9%

8.6% vs 7.0%

9.4%

-14.3% vs <18%

Balanced Income

4.7%

3.9%

4.1%

4.6%

5.1% vs 5.2%

6.3%

-14.1% vs <10%

ESG Balanced

3.7%

3.9%

4.7%

n/a

5.5% vs 5.2%

8.2%

-13.1% vs <10%

Returns are annualised, net of underlying fund charges and the 0.25% RCM fee, and calculated from composite fund data. Individual client accounts will differ because of the timing of cash flows. Launch date is 30 June 2016 (ESG Balanced: 31 March 2017). Maximum loss is the largest fall from peak to trough since launch. ³ ESG Balanced has under 10 years of history. Past performance is not a guide to future returns.

Model

Peer A

Peer B

Cautious Risk

IA Mixed Investment 0–35%
Shares

UK MPS 30%–45% Growth

Balanced Risk

IA Mixed Investment 20–60%
Shares

UK MPS 45%–65% Growth

Adventurous Risk

IA Mixed Investment 40–85%
Shares

UK MPS 65%–85% Growth

Aggressive Risk

FTSE All Share

UK MPS 85%–100% Growth

Balanced Income

IA Mixed Investment 20–60%
Shares

UK RTMA Risk 3 – Moderate

ESG Balanced

IA Mixed Investment 20–60%
Shares

UK MPS 45%–65% Growth

 

Returns after inflation. UK CPI (ONS series D7BT) rose by 3.6% a year from June 2016 and by 5.1% a year over the last five years, which includes the 2021–23 inflation spike.

Model

Since launch: return / CPI / real

5 years: return / CPI / real

Cautious Risk

5.8% / 3.6% / +2.2%

5.2% / 5.1% / +0.1%

Balanced Risk

7.5% / 3.6% / +3.8%

7.0% / 5.1% / +1.8%

Adventurous Risk

8.0% / 3.6% / +4.3%

7.0% / 5.1% / +1.8%

Aggressive Risk

8.6% / 3.6% / +4.9%

6.8% / 5.1% / +1.6%

Balanced Income

5.1% / 3.6% / +1.5%

4.7% / 5.1% / -0.4%

ESG Balanced

5.5% / 3.7% / +1.8%

3.7% / 5.1% / -1.3%

 

3.4 Service

•   
Monthly factsheets and commentary, and a rebalance note explaining every change to a model.

•   
Direct access for advisers to the portfolio managers.

•   
Rebalances implemented in last 12 months: 4 Errors or delays: none

•   
Complaints relating to the models since the last assessment: none

3.5 Conclusions

Model

Outcome

Basis

Action

Cautious Risk

Fair value

Ahead of both peer groups
over 5 and 10 years with lower drawdown; mid-range cost.

Review the <6% maximum
loss guide, which was exceeded (-7.7%) in March 2020.

Balanced Risk

Fair value

Ahead of both peer groups
over 5 and 10 years at equal or lower volatility.

Maximum loss marginally
exceeded the guide (-10.4% vs <10%); review the guide.

Adventurous Risk

Fair value

Ahead of both peer groups
over 5 and 10 years with a materially lower drawdown.

None.

Aggressive Risk

Fair value – monitor

Behind both comparators over
5 years, but with much lower volatility and drawdown than the FTSE All Share
and MPS 85–100% peers.

Monitor relative returns.
Review the wording “aims to exceed long-term equity market returns”, which
has not been met over 5 or 10 years.

Balanced Income

Fair value – monitor

Income target met (4.23%
yield); total return ahead of peers over 5 and 10 years.

Maximum loss (-14.1%)
exceeded the <10% guide. Capital has not kept pace with inflation after
income; review the “maintain real value” wording.

ESG Balanced

Under review

Behind both peer groups over
5 years and 1 year, with higher volatility and drawdown, at the highest cost
in the range.

Investment Committee review
of fund selection and screening; report back to distributors by [date].

 

Overall, the Investment Committee concludes that five of the six models provide fair value to their target market. ESG Balanced is under review because its returns have lagged comparable portfolios at a higher level of risk and cost. We will tell distributors the outcome of that review and any changes that result.

4. Consumer understanding

RCM’s documents are written for financial advisers. Under our agent-as-client arrangement the adviser is our client and explains the models to their own clients. Our job is to give advisers clear, consistent information to do that:

•   
Factsheets: monthly for each model, showing the objective, target ranges, risk level, holdings, charges and performance against peers.

•   
Rebalance notes: issued with every change to a model, explaining what changed and why.

•   
Commentary: monthly market and portfolio commentary.

•   
This document: updated annually, setting out the target market, costs and value of each model.

The target ranges, charges and performance figures in this document are the same as those on our factsheets, so advisers and their clients see one set of numbers.

5. Consumer support

•   
Access: advisers can speak directly to the portfolio managers who run the models.

•   
Implementation: RCM implements model changes on each platform. In the last 12 months there were four rebalances, with no errors or delays.

•   
Charges for moving: RCM charges a single annual fee. We make no charge for joining, switching between or leaving the models; platform charges may apply.

•   
Flexibility: advisers can move a client between models, or out of the service, at any time through the platform.

•   
Additional needs: where an adviser tells us a client has particular needs, including characteristics of vulnerability, we will work with the adviser on any additional information they need.

•   
Complaints: handled under RCM’s complaints procedure, available on request. No complaints relating to the models were received in the period.

6. Information we ask distributors to share

•   
Any issue with this target market, or evidence that a model is being used outside it.

•   
Any foreseeable harm, poor outcome or complaint involving a Rivers model, including for clients with characteristics of vulnerability.

•   
Summary information on how the models are used, such as client numbers by model, where this is readily available. We do not need individual client data.

Contact: Najib El-Rayyes, Rivers Capital Management · ner@riverscm.com · 020 3383 0180

This document is for financial advisers and distributors only. It is not for retail clients. Rivers Capital Management Ltd is authorised and regulated by the Financial Conduct Authority (FRN 801238).

Rivers Monthly Focus July 2021

 

5 Year anniversary of the Rivers portfolios.

The end of June marked 5 years since Rivers launched its risk rated Model Portfolios on Platforms on June 30th 2016. While the scope since then has included the introduction of offshore and ESG portfolios (June 2017) as well as a number of tailored solutions the process has changed little since launch. Our objective then was, and still remains, to build portfolios using sets of diversified funds, combining both passive and active strategies. The Rivers tactical asset allocation strategy systematically adjusts those portfolios to align with the relative risk level, or attractiveness, of the global investment market according to our Risk Committee view. Given this anniversary, in this Focus piece we look back on the relative performance of that strategy. We are delighted to report that all targets have been met in terms of both risk and return. We are perhaps even more delighted to report that, on a risk adjusted basis, we can show that these unbundled model portfolios have outperformed very nearly all listed multimanager fund solutions, after all costs, over the last five years. Alongside this delight however we want to focus on how this performance was achieved, particularly given that, over 5 years of generally positive asset class value growth, the Risk Committee has maintained, for the large part, an underweight risk allocation. For much of the last five years the Risk Committee has held,  and currently hold, a belief that asset valuations are unsustainably high.

 

Our Global View

We have always tried to take a global view on investment. Since our first Risk Committee meeting in 2016, in the aftermath of the UK Referendum which led to Brexit, we’ve tried to view the investment portfolios within the global context. The election of President Trump, whatever our views on him personally, was always likely to influence global economic growth more than Brexit. Despite Trump’s issues with China they affected asset prices less than we expected. His domestic policies, especially on tax, boosted the profitability of US companies, and equity markets, more than we expected.  Similarly the Federal Reserve, raising rates in late 2018, impacted asset prices less than we expected, and cutting rates so quickly, in early 2020, with the backing of aggressive fiscal intervention, boosted valuations for longer than we had expected. Our risk committee was correctly positioned for all of these calls but we were often too early in and often out too soon. Sometimes both. Tactical changes have added to our performance. adding risk during the falls of late 2018 and early 2020 has added value, but it is difficult to conclude that a generally underweight risk position over the last five years will have added value.

 

Adding Risk

Objectively speaking the ability to add risk when it gets cheaper has added value, occasionally a lot, but that is not the biggest contributor to the success of the portfolios we manage. It has been diversification that have been key to the portfolio success at Rivers. By including Diversifiers into the portfolio allocation, which are investments with a low correlation to equity and Interest rate risks, it has been possible to add value overall while reducing losses during the few market falls that the markets have experienced.

 

Portfolio Construction vs Market Timing

The last 5 years, and in fact the last 12 years in reality, have been a time when a simple investment strategy of buying equity risk and adding interest rate risk (to lower overall risk) should have been successful. Over that period Equity indices have seen valuations increase to an astonishing degree. Mega-cap stocks have outperformed and interest rates, over the 5 years have gone from low to non-existent or even negative. In such an environment, adding value as active fund managers has been difficult. The only way to keep up has been market timing, which is difficult, or by the use of efficient portfolio construction. The fact that the Rivers portfolios have not only kept up with but exceeded, on a risk adjusted basis, all the multimanager funds available, passive or active, is primarily a result of efficient portfolio construction. With the wonderful benefit of hindsight it is fair to say the portfolios’ tactical positioning, while having allowed the adding of risk during market sell offs, has not taken full advantage of the opportunity. 

 

Difficult environment for passive strategies

As always with investment the tide changes. Price earnings multiples will not rise forever, inflation will rise, as will interest rates. We are not suggesting any of these economic certainties will make it easier for Rivers portfolios to perform but we do think it will make it a lot harder for passive, market capitalisation led strategies to do well. The lack of Diversifiers in such an environment will make portfolio performance even more difficult.

 

Overvalued Markets?

If, as we currently believe, the US market reaches a level beyond which even the most optimistic investor asks questions followed by a period of multiple “re-rating” then a pure equity and bond market approach is very likely to struggle. A diversified strategy, all other things being equal, will fare better. On a relative basis we expect a tactical diversified portfolio strategy will find it easier to outperform over the coming five years than it has over the last five years. If we are wrong, and the market continues to rise indefinitely, then we remain confident the Rivers portfolios will continue to meet their objectives.

 

 

Disclaimer: Rivers Capital Management is authorised & regulated by the Financial Conduct Authority (FCA) Reference No. 801238  The Model Portfolio is not suitable for all types of investor and investor accounts may only be attached to it by the instruction of a professional Financial Adviser. Past performance is not necessarily a guide to the future performance. Market movements may cause the value of investments and the income from them to fall as well as rise. Unless otherwise stated, the source of all figures contained herein is Rivers Capital Management. Whilst all reasonable care has been taken in preparing this update, the information contained herein has been obtained from sources that we consider reliable but we do not represent that it is complete or accurate and it should not be relied upon as such.

Rivers Monthly Focus May 2021

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During April, the Rivers managed portfolios were rebalanced to the most defensive position possible for each risk rating. This was done as many equity indices were setting alltime highs, Central Banks were continuing with unprecedented monetary stimulus and governmental fiscal spending was pushing national deficits to record levels. There is cause and effect here. For valuations to be sustained at current levels, or rise further, investors must believe that monetary stimulus and fiscal support will be sustained and that economic growth accelerates rapidly. We think that the likelihood of these three conditions being sustained is not only improbable but impossible.

 

In the simplest terms, economic growth will negate the need for fiscal support and accelerate the need for monetary constraint. The reason for the former is the growing government deficits, the reason for the latter is inflation. Inflation, dampened by globalisation and fiscal austerity is now the biggest risk for investors today. In this update we look at why the already obvious signs of inflation are not transitory, as many Central Banks suggest, and why the pressures it will impose on monetary conditions cannot, sensibly, be ignored for very long.

 

To start on a positive note we think that economic growth in the coming quarters, in the UK And Globally, will be strong. Pent up consumer demand, a relaxation of lockdown restrictions and generous government support make economic growth in the coming quarters almost certain. The most obvious risk to this may be the re-emergence of the pandemic, for whatever reason, but this is not a major factor in our current cautious outlook. On balance we think despite the risks, economic growth will surprise to the upside. Unemployment will fall rapidly and corporate earnings will grow. We do not think they will grow to the extent being predicted by analysts but not because of a shortage of sales but because of rising costs.

 

The costs which are most concerning are material input costs and labour costs. As material input costs are determined by commodity prices they have already risen substantially. Be it because of low levels of investment, in the case of oil and traditional energy, or Covid supply constraints, in the case of timber and agricultural products. Nearly all commodities are at all-time highs and producer prices indices have reflected this for a while. Labour costs are arguably less likely to rise because of high levels of unemployment. That said, in the US, average hourly earnings shot up 8.2% in April and since June 2020 have an average year on year gain of about 4.8%, currently (just) ahead of inflation. The wage rise in 2020 (in part due to Covid restrictions and some sort of “hazard pay” premium) is probably “transitory,” but wage growth is characteristically stubborn. It rarely reverses and if economic growth is strong, as expected, wages are set to increase when activity heightens in the summer. In the UK many pay settlements are closely related to inflation so the problem is self-perpetuating.

 

Last week in the US the effect of overall price rises became clear. The April Consumer Price Index or US CPI rose, on a year-over-year basis, to 4.2%, before seasonal adjustments. This was the biggest increase in monthly CPI since 4.9% in September 2008. A similar effect is likely in the UK this week. With producer prices (PPI) appearing to rise both sides of the Atlantic it is likely this trend will continue for some time.

 

The fact that inflation cannot be ignored by Central Banks for very long can be seen in its effect on benchmark interest rates already. Despite the Federal Reserve buying $128billion dollars of US debt per month, in an attempt to suppress rates, this month the yield on 10 Year Treasuries rose to 1.7%. Historically this is not high but compared to 0.60% last August it is a significant jump, all while interest rates were set to zero and during the most aggressive period of quantitative easing ever. It appears that when there is real inflationary risk, quantitative easing is less successful at reducing Treasury yields. The US 10 Year Treasury rate is the benchmark ‘discount level’ used for future corporate earnings evaluation, if it were to continue to rise, say above 2%, it would make equity valuations look even more extravagant, and unsustainable than they do already.

 

With hindsight, the fiscal stimulus provided by President Biden’s $2trillion package early this year may be called into question. As it was distributed directly to consumers already looking forward to spending built up savings (as well as some deserving needy), its effect on inflation has been material. The suggested $4trillion to come is at least targeting infrastructure spending so may not increase consumer spending so directly. The Federal Reserve is keen to argue this inflation is transitory, but if economic growth accelerates as they are also predicting, it is difficult to know what, other than higher interest rates, will slow it.

 

With this pressure on inflation and some compelling evidence that equity values have been inflated by high levels of speculation, we have adjusted the portfolios accordingly. We have reduced equity exposure, especially in the US, where valuations are highest and increased the allocation to assets more likely to offer protection from inflation. While we have attempted to add inflation protecting assets our overall objective has been to lower risk. We do this, as always, with the expectation that risky assets that are available today, will be available in future at lower prices or better valuations. While we wait for that to occur the portfolios should continue to offer positive returns.

Rivers Monthly Focus April 2021

 

The Pandemic One Year On

This time last year countries around the world were beginning to formulate strategies of how to tackle the Covid-19 pandemic. They realised that drastic action was required to contain the spread of the virus and mitigate economic damage. Many governments concluded that without fiscal and monetary intervention, a crisis unlike any seen since the great depression was a distinct possibility. A year on, while there is still a long way to go before we can say that the pandemic is over, there are some bright spots on the horizon. Arguably the most important is that both the US and the UK have implemented successful vaccination campaigns, with the US announcing 3 million vaccines given per day and the UK approaching the milestone of 50% of the population having been given at least one dose. This month we look at the likely routes out of the pandemic for economies and where the best tactical investment allocations lie. 

 

US Stimulus

We can already see business cycle indicators showing that the global economic recovery is underway. This has been driven to a large extent by the strength of the US economy and the pent-up spending potential of US households as they receive their latest stimulus cheques. So far during the pandemic, stimulus payments to households now total around $3 trillion, this is equal to 20% of US personal consumption and is three times as much as was paid out during the global financial crisis. If this stimulus money hits the economy  as fast as economists are predicting, this will be beneficial for many sectors from leisure and hospitality to retail and financials but may well highlight supply constraints. 

 

Jobs Recovery

We think that the best pockets of upside lie within those sectors that are at the value end of the market. Growth stocks have been the real drivers of stock market performance since the Financial Crisis but it seems that a value cycle may now finally be underway. The major caveat to a strong US market is that strong financial conditions will bring inflation back into the equation, especially if tight labour market conditions trigger sharp wage increases. In spite of the surge in new jobs in March, total payrolls are still 8.4 million short of where they were pre-pandemic, but given that payroll figures were a third higher than estimates, things are going in the right direction. 

 

What is difficult to ascertain is how much of the good news has been discounted by the market. We believe that a significant amount has and this will likely lead to increased volatility as multiples are hitting historic peaks, medium term interest rates are rising and tax hikes are being debated in congress. It is volatility stoked by the uncertainty around these factors in which we see the best opportunities for our clients.

 

UK Return to Growth

The UK’s growth rate has suffered more than most developed economies partly due to the poor initial handling of the pandemic and potentially, the hidden impact of Brexit, which is ongoing. Moving forward, this has been offset to some extent by the speed of the vaccine roll-out, to the extent that the IMF has just revised upwards its 2021 growth rate for the UK economy from 4.5% to 5.3%. The UK market remains undervalued compared to its peers but caution is warranted given the headwinds.  These headwinds include the huge debt to GDP burden and the unresolved issues of the post Brexit economy.

 

Europe slow on vaccine roll-out but markets strong

Our European neighbours have been publicly battling a shortage of vaccines as the virus spread continues.  A third wave has forced some countries into further lockdowns which pushes economic recovery  further out. Despite the slow rollout and the new lockdowns, Eurozone markets have significantly outperformed other global markets. During March many EU indices, including the German Dax 30 and the French CAC 40 materially outperformed both the S&P 500 and the FTSE All Share. Since late 2020, the region has benefited from the rally in value sectors, where weightings are higher due to a prevalence of more traditional industries, as growth and high-tech sectors have lagged.

 

EM performance steady rather than stellar

Emerging markets have been mixed with countries like China able to handle the pandemic well (Non-manufacturing activity expanded for 11 months in a row, while export growth is 32% above trend), to countries like Brazil, which is currently riven with both political uncertainty and a laissez faire attitude to Coronavirus control. On the other hand, India’s economic and market outlook remains positive as the government seems to want to avoid any major lockdowns. At the moment, It appears that the second wave will not meaningfully diminish the strong economic bounce back, which is bolstered by the government’s loose fiscal stance. India has one of the strongest real GDP growth outlooks globally with 12.5% upside between now and 2022.

 

Return to inflationary environment

When constructing multi-asset portfolios the spectre of  rising interest rates, when both equities and bonds are expensive, is daunting. The fear of inflation has been affecting bond markets since the beginning of this year yet it has seemingly been ignored by equity markets. As we begin to see economic recovery accelerating with companies and consumers holding record cash in reserve we expect there will be upward pressure on prices..  Whether this translates to sustained inflation is, currently, the most debated point of all amongst investors. The risk that it does, is enough to justify our current cautious stance. Any further rebalance, lowering exposure, needs to be well timed and short lived. With current valuations already pricing in an almost perfect scenario we think the opportunity cost of lowering risk further is low.

 

The Rivers Outlook

We are seeing strength in many markets both developed and emerging and indices are hitting new all-time highs driven to a large extent by momentum and money flows but we think that some caution is warranted. We have positioned our portfolios to take advantage of the upside in the markets while still protecting our clients’ capital on the downside. We believe that given the underlying structural shift in the market driven by inflation fears and exuberant valuations we will see more volatility which will provide good opportunities for us to deploy into those asset classes like value and subsectors like energy, semiconductors and consumer discretionary, where we believe there are still potential returns to be found.

 

Rivers Monthly Focus February 2021

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Global equity markets have been volatile but generally increasing in value since the lows of March 2020. While believing the opportunity to increase risk at these lows was good we have become concerned in recent months that valuations have become too high. This is most significant in the valuations seen in technology and more generally in US stocks. The availability of liquidity and low interest rates have been obvious drivers for this phenomenon but so too has rising retail investor speculation. For this month’s Focus we take a look at this speculation and specifically at the very unusual events that occurred around GameStop stock in the last week of January. 

 

GameStop, an ailing bricks-and-mortar US retailer of video games and consoles, is interesting as it was the clearest example of social media led, speculative activity in recent months. The stock, unloved and loss making, had drifted down from around $50 in 2015 to under $5 in October 2020. It increased to about $20 at the start of 2021 and in the last week of January it rose 323 percent meaning that for the month it was up around 1,700 per cent. This was a speculative bubble. That is, the price departed wildly from the fundamentals. Some investors who got in early and got out early made a lot of money. Just as many people, who got in too late or stayed in too long, lost a lot of money, as valuations came back to earth. 

 

The GameStop episode became newsworthy, as it tested a common interpretation of the financial markets. It was reported as a David versus Goliath situation where on one side the little guys (mostly amateur traders, mostly young, stuck at home), were able, by coordinating with each other on message boards, such as Reddit’s forum “WallStreetBets”,  to conspire to create the speculative bubble. On the other side, hedge funds or big Wall Street or City traders would fail in their quiet conspiracy to unfairly bet against vulnerable corporations to drive down prices – known as “going short”. 

 

The question posed was whether financial markets competitively and efficiently allocate capital via the medium of the stock price or if instead they are rigged in order to make unseemly profits at the expense of the little guy. Remarkably, the little guys dominated for a while. Perhaps, at the beginning, they evaluated GameStop as genuinely worth a bit more than the price it was trading at. But then they kept going. They succeeded in creating a speculative bubble even with the hedge funds pulling in the other direction. More often than not, it is the latter that prevail. In this case, the hedge funds appear to have swallowed their losses and to have refrained from taking further short positions.

 

There is no need to feel sorry for the hedge funds. Their business is risk. They are aware of the wisdom in the dictum, often attributed to Keynes, “The market can stay irrational longer than you can stay solvent.” Even after taking their losses, these institutional investors remain wealthy. But the hedge funds in this case are not bad guys. They were doing what they were supposed to do: pushing the price of GameStop toward a level more consistent with economic fundamentals and thereby sending a useful signal for the allocation of capital.

 

There will be some traders for whom one should feel sorry. Those are the ones who jumped on the GameStop bandwagon, buying after the price had already begun rising, and determinedly stayed in even as the price went down. As a consequence of playing the Reddit game, they probably lost most of the money that they invested – losses that some of them will be ill able to afford. Gamestop now trades at about $45 having peaked at $450. According to some reports the hedge funds ‘closed’ their short positions at $118 so all the purchases above that price were retail investors buying stock which, according to even the most optimistic analyst is not worth $25.

 

Unsurprisingly the regulator is investigating what has happened here. There is no doubt that a ‘conspiracy’ to manipulate market prices had occurred. The result is likely to be more regulation and further restrictions on commission free trading, especially leveraged positions. To us this is indicative of a high and rising level of speculation that highlights our current preference for caution. If retail investors, taking no regard for the fundamentals of a stock, are able to generate sufficient demand to manipulate prices, even in the short term, there is probably an excess of liquidity. Further analysis of small sized derivative trading shows that this speculation is not limited to single stocks but is now at levels not seen since the Dot-com boom of 2000. The bias of purchasing calls over puts (betting on market increases over market decreases) is also the highest since 2000. With speculation this high, we prefer to take a step back which is why we rebalanced recently to lower the portfolios’ overall US exposure. Our overall risk level remains at 2 (out of 7) but we have increased overall non-US equity exposure where valuations are, on a relative basis, more attractive.