Morningstar - Q2 2022 - 8

Dispatches
The Dreaded 'Triple R'
Recession, rising rates,
and real income decline
challenge investors.
Phillips Curve
10
The Four Horsemen of Investing
Ivory Towers
12
The Power of the 60/40 Portfolio
Policy
15
The Expensive Problem of
Small Retirement Plans
Sustainability Matters
17
Private Markets Offer
Sustainable Opportunities
19
20
Global Briefs
Global
Americas
26 Australia & New Zealand
27
Asia
LETTER FROM THE BOARD
Dan Kemp
In the wake of Russia's invasion of Ukraine,
we sent a version of the following note on March 18
to clients of Morningstar Investment Management.
It was written by my colleagues Scott Dixon,
Ricky Williamson, and Mark Preskett. It convincingly
argues that although it is a dangerous time for
investors, especially for those who draw a
straight line from economic events to portfolio
changes, we as investors must be intentional and
focused on our goals.
A growing concern about the war in Ukraine
is the idea of secondary-effect risks. In
addition to the conflict's well-publicized impact on
commodity prices, investors are grappling
with fears of what we might call the Triple R-
recession, rising rates, and real household
income decline.
Many of the questions so far are along the lines of:
gCould the spike in commodity prices cause the
global economy to slow or enter a recession?
gIf inflation gets out of hand, how aggressively will
central banks act?
gHow severe could the market downturn get if we
see a combination of a recession and rising rates?
gAt what point should investors consider buying?
For those asking the first three questions, the
logic is presumably that if economic growth is at
risk, they might consider selling growth assets.
However, investors with long-term goals can
strengthen their position by embracing the fourth
question and using an approach that is risk-aware,
intentional, contrarian, and aligned with goals.
8
Morningstar Q2 2022
Even the market has difficulty pricing in such
signals. In mid-2018, for example, the global bond
markets started pricing in a deteriorating
economy while global equity markets were pricing
in a further expansion. Then, it suddenly
reversed in late 2018, as equity markets priced in
a decline and bond markets did the opposite.
So, what does that mean for a multi-asset
portfolio? It means a few things. First, a key when
dealing with fears of a recession is to distinguish
between true risk (a negative knock to
corporate fundamentals) and negative sentiment
(investors repricing their expectations). At an
individual level, falling real wages hurts. This
means that wages are rising by less than inflation,
Portfolio Response: Readiness and Robustness
As long-term investors, we need to remain
humble and not overestimate our ability to predict
the outcome of seismic macro events. We have
no advantage over other investors in predicting
the course of the Russia-Ukraine conflict, in
the same way we had no advantage in creating a
road map for COVID-19 in 2020.
What we can do, however, is thoroughly assess
the investment landscape. As patient, long-term
investors operating in a market influenced
by fear and greed, we understand that excess
returns could become available when an asset's
price diverges significantly from a reasonable
assessment of its fair value.
The caveat is, given the level of uncertainty, we
would like to see a wide gap between current
prices and fair values when we make meaningful
changes to our investments.
Does an Economic Downturn Affect Markets?
As we contemplate investment decisions-
or any financial decisions, for that matter-it can
be tempting to try to predict where the economy or
earnings cycle is heading. That is, in theory,
we could pick when (or which part of) the market
is about to weaken and seek shelter until it
reaches a cyclical low. The challenge, of course,
is that this is notoriously difficult to do because
we would need to predict the future twice: once to
get out of risky assets at the right time and
again to re-enter them at the bottom of the cycle.
https://www.morningstar.com/authors/2076/dan-kemp

Morningstar - Q2 2022

Table of Contents for the Digital Edition of Morningstar - Q2 2022

Contents
Morningstar - Q2 2022 - Cover1
Morningstar - Q2 2022 - Cover2
Morningstar - Q2 2022 - 1
Morningstar - Q2 2022 - 2
Morningstar - Q2 2022 - Contents
Morningstar - Q2 2022 - 4
Morningstar - Q2 2022 - 5
Morningstar - Q2 2022 - 6
Morningstar - Q2 2022 - 7
Morningstar - Q2 2022 - 8
Morningstar - Q2 2022 - 9
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Morningstar - Q2 2022 - 11
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Morningstar - Q2 2022 - Cover3
Morningstar - Q2 2022 - Cover4
https://www.nxtbook.com/nxtbooks/morningstar/magazine_2024q1
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https://www.nxtbook.com/nxtbooks/morningstar/magazine_2023q3
https://www.nxtbook.com/nxtbooks/morningstar/magazine_2023q2
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https://www.nxtbook.com/nxtbooks/morningstar/magazine_2022q4
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https://www.nxtbook.com/nxtbooks/morningstar/magazine_20161011
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https://www.nxtbook.com/nxtbooks/morningstar/magazine_20160405
https://www.nxtbook.com/nxtbooks/morningstar/magazine_20160203
https://www.nxtbook.com/nxtbooks/morningstar/magazine_20161201
https://www.nxtbook.com/nxtbooks/morningstar/magazine_20151011
https://www.nxtbook.com/nxtbooks/morningstar/magazine_20150809
https://www.nxtbook.com/nxtbooks/morningstar/magazine_20150607
https://www.nxtbook.com/nxtbooks/morningstar/magazine_20150405
https://www.nxtbook.com/nxtbooks/morningstar/magazine_20150203
https://www.nxtbook.com/nxtbooks/morningstar/magazine_20151201
https://www.nxtbook.com/nxtbooks/morningstar/magazine_20141011
https://www.nxtbook.com/nxtbooks/morningstar/magazine_20140809
https://www.nxtbook.com/nxtbooks/morningstar/magazine_20140607
https://www.nxtbook.com/nxtbooks/morningstar/magazine_20140405
https://www.nxtbook.com/nxtbooks/morningstar/magazine_20140203
https://www.nxtbook.com/nxtbooks/morningstar/advisor_20141201
https://www.nxtbook.com/nxtbooks/morningstar/advisor_20131011
https://www.nxtbook.com/nxtbooks/morningstar/advisor_20130809
https://www.nxtbook.com/nxtbooks/morningstar/advisor_20130607
https://www.nxtbook.com/nxtbooks/morningstar/advisor_20130405
https://www.nxtbook.com/nxtbooks/morningstar/advisor_20130203
https://www.nxtbook.com/nxtbooks/morningstar/advisor_20131201
https://www.nxtbook.com/nxtbooks/morningstar/advisor_20121011
https://www.nxtbook.com/nxtbooks/morningstar/advisor_20120809
https://www.nxtbook.com/nxtbooks/morningstar/advisor_20120607
https://www.nxtbook.com/nxtbooks/morningstar/advisor_20120405
https://www.nxtbook.com/nxtbooks/morningstar/investorconference2012
https://www.nxtbook.com/nxtbooks/morningstar/advisor_20120203
https://www.nxtbook.com/nxtbooks/morningstar/advisor_20121201
https://www.nxtbook.com/nxtbooks/morningstar/advisor_20111011
https://www.nxtbook.com/nxtbooks/morningstar/advisor_20110809
https://www.nxtbook.com/nxtbooks/morningstar/advisor_20110607
https://www.nxtbook.com/nxtbooks/morningstar/advisor_20110405
https://www.nxtbook.com/nxtbooks/morningstar/advisor_20110203
https://www.nxtbook.com/nxtbooks/morningstar/advisor_20111201
https://www.nxtbook.com/nxtbooks/morningstar/advisor_20101011
https://www.nxtbook.com/nxtbooks/morningstar/advisor_20100809_lincoln
https://www.nxtbook.com/nxtbooks/morningstar/advisor_20100809
https://www.nxtbook.com/nxtbooks/morningstar/advisor_20100607_lincoln
https://www.nxtbook.com/nxtbooks/morningstar/advisor_20100607
https://www.nxtbook.com/nxtbooks/morningstar/advisor_20100405_lincoln
https://www.nxtbook.com/nxtbooks/morningstar/advisor_20100405
https://www.nxtbook.com/nxtbooks/morningstar/advisor_20100203
https://www.nxtbook.com/nxtbooks/morningstar/advisor_20101201
https://www.nxtbook.com/nxtbooks/morningstar/advisor_20091011
https://www.nxtbook.com/nxtbooks/morningstar/advisor_20090809
https://www.nxtbook.com/nxtbooks/morningstar/advisor_20090607
https://www.nxtbook.com/nxtbooks/morningstar/advisor_20090405
https://www.nxtbook.com/nxtbooks/morningstar/advisor_20090203
https://www.nxtbook.com/nxtbooks/morningstar/advisor_2008fall
https://www.nxtbook.com/nxtbooks/morningstar/advisor_2008summer
https://www.nxtbook.com/nxtbooks/morningstar/advisor_2007spring
https://www.nxtbook.com/nxtbooks/morningstar/advisor_2007fall
https://www.nxtbook.com/nxtbooks/morningstar/advisor_2007summer
https://www.nxtbook.com/nxtbooks/morningstar/advisor_2008spring
https://www.nxtbook.com/nxtbooks/morningstar/advisor_2008catalog
https://www.nxtbook.com/nxtbooks/morningstar/advisor_2008winter
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