It’s fair to say that 2022 will go down in history as the year where investors’ portfolios were turned on their head. Many things that worked in the previous decade have become a drag on performance, most notably the large declines seen across mega cap US stocks including a 60% decline in Tesla (TSLA:NASDAQ) and a 48% drop in Amazon (AMZN:NASDAQ).

Rather than being a long-overdue market correction, some experts believe the investment landscape has just experienced a large structural change. This could require an overhaul of your investment portfolio.

Howard Marks from Oaktree suggests we’re experiencing the third major sea change for investment markets of the last 50 years. He says: ‘We’ve gone from the low-return world of 2009-21 to a full-return world, and it may become more so in the near term. Investors can now potentially get solid returns from credit instruments, meaning they no longer have to rely as heavily on riskier investments to achieve their overall return targets.’

Marks adds: ‘If you grant that the environment is and may continue to be very different from what it was over the last 13 years – and most of the last 40 years – it should follow that the investment strategies that worked best over those periods may not be the ones that outperform in the years ahead. That’s the sea change I’m talking about.’

Between 2009 and 2021, interest rates were very low which made it easy for companies to borrow money to grow. Now it’s more expensive to borrow and lenders – be it through loans or bonds – or investors through share placings are less willing to back loss-making businesses or ones with minimal prospects for decent profits near-term.

Just look at Trackwise Designs (TWD:AIM) which was on the verge of running out of cash and only secured an equity fundraise by issuing new shares at an incredible 92% discount to the market value. Existing investors have been battered.

Aside from companies in financial trouble, the other area of the market to reconsider if held in your portfolio is expensive growth stocks. While most will have already seen a derating over the past year, I fear these types of stocks will remain out of fashion for some time.

In an era where interest rates could stay higher for longer, why would an investor want to pay 40-plus times earnings for a business offering the promise of disruption, innovation and transformation when they can find plenty of companies on less than half that rating that are already profitable and growing? There will be the odd exception where it is worth paying up, but for most it will be hard going to win back the market’s favour.

Managers of growth funds can be excused one year’s bad performance, but next year they’ll have to prove to investors that more attention is being paid to valuation and that they are actively seeking better value opportunities now they’ve lost the tailwind which previously fuelled the growth bandwagon.

We’ll explore these issues in Shares over the coming months. Until then, I would like to wish every reader a Merry Christmas and a Happy New Year. We’ll be back on 12 January 2023.

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