- The inflationary period we’re in is transitory but could last up to two years, says Jim Smigiel.
- Several stocks in the commodities sector are overpriced, he says.
- Being “positive on inflation sensitive assets” has helped his fund outperform its peers, he says.
A broad-based approach that is responsive to macroeconomic factors lies at the heart of strategy building for Jim Smigiel, SEI’s chief investment officer.
The firm manages or administers approximately $1 trillion in hedge, private equity, mutual fund and pooled or separately managed assets, including approximately $384 billion in assets under management and $836 billion in client assets under administration. In the Dynamic Asset Allocation Fund ($875 million in AUM) that he manages, Smigiel was in the 91st percentile at the one-, three-, and five-year marks, according to Bloomberg.
His approach to the current inflationary environment is one that also requires an expansive view and echoes the June FOMC remarks that the world waited for with bated breath. On Wednesday, Federal Reserve members remained firm that the recent spike in inflation was “transitory,” and also kicked off discussions on tapering its bond purchases.
While Smigiel agrees that the current period is transitory, he argued that it could last for two years rather than a few months as the world slowly recovers from the COVID-19 pandemic.
“Obviously, the US is doing extremely well,” he told Insider. “China is doing extremely well. We’ll probably see a little bit more of a rotation because not all the areas of the world, of course, synced up as it relates to the reopening of other economies….And perhaps parts of Asia, Europe, and the UK are still kind of lagging behind. So we do expect to see this little bit of a rotation, a handoff, if you will, on that major economic impulse coming from the United States.”
Smigiel described himself and his team as being "positive on inflation sensitive assets" - an outlook that drives the overarching strategy he employs in his Dynamic Asset Allocation Fund, which has an S&P beta. This means the benchmark index is used to measure volatility in his portfolio.
His clients are increasingly becoming concerned about the inflationary environment, favoring a portfolio with more of a deflationary focus. Yet, he and his team have been able to convince them of the strength in picking unloved names that have major growth potential.
"We'll layer on what we view as being our macro themes, broad-based macro trades that we see, and hope to be positive for the investors across the capital markets….What has changed [in our fund] is the active positions that we put on top. Instead of trying to add value by buying one energy name versus another, or buying one sector versus another, now you're trying to add value over and above the S&P through a more macro environment."
He contended that markets are on the precipice of change, with momentum now leading to a convergence between growth and value stocks.
As such, "basically we're still leaning into a higher inflationary environment than perhaps the market expects, which gives us positive views and positioning in commodities, positive views and positioning in value sectors of the markets, such as energy, which has done incredibly well over the last one year," he said. "But it's still well below its pre-COVID valuations."
Opportunities in scarcity assets
As both growth and inflation rise, so-called scarcity assets such as commodities and physical items like precious metals become valuable. This is especially the case when the economy risks overheating, said Smigiel.
He laid out his strategy for picking stock winners in this environment.
- Take a broad view of macroeconomic trades rather than "trying to add value by buying one energy name versus another, or buying one sector versus another."
- Focus on the new norm that goes against the previous trends in a low inflationary environment, which not all market watchers have accurately identified yet. As a result, he and his team are focusing on commodities that have been "under-allocated to, and certainly, unloved for quite some time."
- Commodities can be relatively volatile, but are "very, very broad in nature." Smigiel advises to watch for "some supply constraints out there on the horizon from a lack of capital investment over the last number of years."