The boutique global equity specialist has been promoting its ‘new era’ investment playbook since July, with early results showing its success, but one scenario could upend it.
For the past nine months, Talaria Capital has argued that the strategies that worked over the past 30 years are unlikely to hold over the next five to 10 years, outlining a four-pillar playbook it believes is better suited to the period ahead.
Against a backdrop of rising US government debt – with interest on US public debt nearing US$1 trillion, while corporate tax receipts amount to just US$452 billion – the playbook favours short duration, strong balance sheets, real assets and diversification. On the other hand, Talaria has advised investors to seriously consider rotating out of sovereign debt.
So far, the proof over that period is in the numbers: US long bonds have been hammered since 2020, while short-duration bonds and Treasury bills have held up or gained.
Meanwhile, in real assets, global metals and mining are up more than 50 per cent over the past nine months, even despite a rocky start to the year. Global infrastructure is also up around 13 per cent since June.
For diversification, the team pointed to the Talaria Global Equity Portfolio Hedged fund, which delivered returns of “just shy of 10 per cent” over the past nine months. It is available in both currency-hedged and unhedged ETF formats.
But while the playbook has shown early signs of success, the team has identified one scenario where it may not work.
At the firm’s latest quarterly webinar, co-CIO Hugh Selby-Smith said the key risk to its thesis would be a shift to non-inflationary growth, which today would mean the AI-driven productivity boom coming to fruition.
“The reason that it works fantastically well, of course, is that productivity growth is real growth without any inflationary impulse…[Ours] would not be a playbook to play if that turns out to be the path that we all take,” Selby-Smith said.
As he explained, Talaria’s framework is built on a structural debt problem driven by trade imbalances, rising fiscal deficits and subdued discretionary spending in the US underpinning corporate profits, meaning any escape from the current backdrop would require a path out of that debt dynamic.
Here, he outlined three possible options, all of which are relatively difficult to achieve.
The first is austerity, or bringing outgoings below incomings. Pointing to Victoria’s well-publicised public debt situation as an example, he argued the political appetite for such measures is “zero”.
“Every time there’s something bad, they’ll give you something free. So that’s kind of great if you’re a citizen. But you know, the appetite for austerity is zero, as far as I can tell [that’s true] when I go anywhere in the world.”
Next, he discussed how the firm has long believed the most likely path is financial repression, where savers effectively subsidise debtors – shifting the focus of Talaria’s argument to sovereign debt.
“So [in that case], the real yield on government securities is going to be under the level of nominal growth, and you’re going to get negative real yields on government debt.
“Many of you would have heard that we would have the lowest level of government securities in client portfolios that you can afford from a career risk point of view. That would be zero for me,” he told webinar attendees.
Finally, he said the third path to addressing the debt burden would be to pursue a growth-led strategy.
“This was sort of what Liz Truss tried to do. She was obviously removed within six weeks, and she pretty much blew up the pensions market in the UK.”
While the firm stopped short of betting against AI in the way GQG has, its current investment approach is based on the assumption that it will not deliver the productivity gains some expect.
Of the three key factors Talaria expects to drive markets over the next 12 to 18 months, Selby-Smith said the AI infrastructure buildout and its return on investment (ROI) sits at the top of the list.
He noted that multiple risk scenarios remain. The “picks and shovels” providers could win, while hyperscalers face pressure to deliver returns on heavy spending. On the other hand, AI capex could also be reined in, weighing on the broader supply chain, with both sides exposed to downside.
Talaria’s main portfolio holdings are ultimately elsewhere, in line with its “new era” investment playbook. It includes healthcare and biopharma names such as Roche and GSK, alongside gold miners like Newmont Corporation.
