On March 1st, the Ark Group CIO Office released its highly anticipated 2024 Global Report titled “Seizing Small Certainties, Investing in Mega Trends,” which garnered widespread attention.
Huang Zheng, founder of Pinduoduo, once referenced a vivid analogy from Warren Buffett: “If you’re sitting in a restaurant and Yao Ming walks in, you’ll spot him immediately. But if someone of average height enters, you likely won’t even notice. When you observe things with an ordinary mindset and common sense, the distinction between good and bad becomes obvious. On the other hand, minor differences in trivial details can often be overlooked—what truly matters is focusing on the big picture.” Recognizing mega trends is akin to spotting “the Yao Ming walking into the room.”
Once mega trends are understood, we advise wealth managers to adopt the “simple decision-making” principle for asset allocation. This approach aligns with Buffett’s concept of decisions that are like “one-foot hurdles”—easy to clear.
2024 is a super election year, encompassing half the world’s population, with global political policies facing heightened uncertainty. Geopolitical conflicts may continue to pose risks. Wealth managers must guard against low-probability, high-impact events by accelerating the implementation of global, multi-asset allocation. To address investors’ four key needs—wealth safety, liquidity, preservation, and growth—Ark Group launched the CATS asset allocation framework in the second half of 2023. Each letter in “CATS” represents a tailored solution, and we provide the following specific allocation strategies:
- Adjusting 3C (Cash Management Solution) – Tactically Shifting Cash Asset Categories and Ratios
The first letter in CATS is “C,” standing for the Cash Management Solution. Our philosophy is “Care Customer’s Cash,” emphasizing care, client focus, and liquidity management—hence the shorthand “3C.”
We recommend investors adjust their cash asset allocations, such as reducing exposure to money market funds and time deposits, while beginning to allocate to strategies benefiting from a potential rate-cut environment to mitigate declining portfolio yields. Two key allocationerve attention:
First,Investment-Grade Bonds: Given market risks and uncertainties, high-quality, investment-grade bond funds are becoming increasingly attractive. While their upside may not match high-yield bonds, their safety is superior.
Second,Structured Products: With 2024 being a super election year—affecting ~2.5 billion people across voting nations—quantifying event-driven shocks is challenging, but market volatility will undoubtedly rise. Increasing allocations to structured products, particularly principal-protected or limited-downside structures from reputable issuers, can enhance portfolio “anti-fragility.”
- Adding 3A (Global Secondary Wealth Growth Solution) – Enhancing Hedge Fund Strategies in Volatile Markets
On December 13, 2023, Fed Chair Powell signaled that rate cuts were now under consideration, even before inflation fully returns to 2%. Global stocks and bonds rallied in response. While the Fed may not cut rates immediately, the window has opened. Historically, risk assets perform well post-rate-hike peaks, making this a strategic entry point.
Rate hikes have peaked, good news for hedge funds and other alternative assets
Historical data shows that in the 12 months after the last rate hike, strategies like CTA/managed futures, event-driven, macro, and arbitrage have delivered double-digit returns, with CTAs leading. Other alternatives, such as private credit and infrastructure, have averaged over 10% returns. Real estate is nuanced, but sectors like multifamily development benefit from valuation rebounds and lower financing costs.
Global Secondary Wealth Growth Strategy
In terms of specific allocation strategies, we can focus on trend tracking and stock neutral strategies: on the one hand, these two strategies often hold a large amount of non-leveraged cash and can enjoy the dividends of higher market interest rates; on the other hand, the short-selling environment has also improved significantly. Data shows that short-selling returns have exceeded dividends for the first time since 2008, making stock neutral strategies more beneficial. In addition, investors can also reduce the capital threshold for multi-strategy portfolio investment and the energy investment in portfolio management through the FOF form.
Go with the trend and match 3T (global first-level wealth growth solution)
Focus on underlying high-quality assets and allocate diversified primary strategies
The third word in CATS solution is T, which stands for global first-class wealth growth solution. Our proposition is Technology (technology-led), Trans-cycle (crossing the cycle), and Top (selected top). The solution is referred to as 3T.
On the one hand, what deserves attention in private equity are M&A PE strategies and Silicon Valley VC assets. Based on the historical experience of the past 30 years, when M&A PE strategies are deployed in the years at the end of the interest rate hike cycle, their returns will generally far exceed the historical average; and the emerging technological innovation (AI, blockchain, room-temperature superconductivity, etc.) and reasonable investment timing will provide excellent long-term investment opportunities in Silicon Valley VC assets.
Large language models have exploded with revolutionary potential, ChatGPT-like applications are popular all over the world, and a new technological revolution is taking place, which will comprehensively affect intellectual work centered on education, science, and culture, completely change the knowledge ecology, and initiate disruptive changes in intelligent information processing and information resource management. In Gartner’s latest report titled “Hype Cycle for Artificial Intelligence, 2023”, Gartner gave a very high evaluation of generative AI, believing that generative AI is the technology with the most extensive impact in the past decade.
A breakthrough technology will last for a relatively long time, leading a new round of global innovation cycle, thus realizing the landing of technological breakthroughs into applications. At the just-concluded Asian Financial Forum, industry experts shared a set of data that the global revenue of artificial intelligence software, hardware, services and sales will reach US$900 billion in 2026, compared with only US$318 billion in 2020. By 2030, artificial intelligence cloud is expected to contribute US$15.7 trillion to the global economy.
On the other hand, physical assets have also gained favor among many investors in the past two years. They have the characteristics of crossing cycles, resisting inflation, and having low correlation with the performance of other types of assets. We believe that the high-quality physical assets worthy of special attention are mainly divided into the following two categories:
First, the rental apartment development strategy. The current high interest rate environment has led to a significant reduction in the number of newly started projects and reduced market competition; in the next 3-5 years, when the project is completed and enters the exit period, it is expected that the interest rate reduction cycle will be completed, and the exit valuation will have good support.
Second, the strategy of holding infrastructure for rent. Mature infrastructure assets (such as social utilities) have typical characteristics such as rigid demand, irreplaceability, benefit from inflation, and low correlation with economic cycles. They can help investors successfully cross the cycle and continue to obtain stable returns. They are one of the core assets of the current stable allocation.
Our recommendations for private equity fund allocation strategies:
First, grasp the allocation rhythm and make good use of DPI funds: allocate PE in the first year, and allocate again two years later, looking at rolling returns in the long term; select flagship strategies of top managers to maintain a relatively stable IRR level in the long term; allocate with a 7-10 year outlook, and recycle the DPI funds returned by PE funds.
Second, when first allocating private equity funds, start with FOF: For novices in private equity funds, it is recommended to start with FOF allocation. After a few years of establishing a relatively complete cognitive system for PE, you can consider allocating single-industry funds (such as technology, medical care, etc.), as well as real estate funds such as U.S. rental apartments and data centers with relatively short payback periods.
Building a safety cushion with 3S (global protection inheritance solution)
Multi-regional insurance configuration enables wealth “crossing”
The fourth word in CATS solution is S, which stands for security and inheritance solution. Our proposition is Security (safety as the bottom line), Succession (family inheritance), and Sustainability. The solution is referred to as 3S.
The window for intergenerational wealth inheritance has been opened. In the face of increasing uncertainties, we recommend overweighting insurance to achieve the key goals of wealth management and inheritance for investors. In our global asset allocation security review, we found that more than 30% of investors have allocated insurance in multiple regions around the world.
First, to avoid the risk of reduced cash flow after retirement, make adequate preparations from the perspective of cash flow protection.
Second, give the next generation the right to choose.
Third, make plans for intergenerational wealth inheritance in advance so that each generation has the ability and conditions to pursue happiness.
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