Catching the Nominal Drift

Our focus on resilient wealth creation is rooted in the notion that capital can be deployed in such a way that it keeps pace with the nominal drift of the economy over time and thus retains its purchasing power. Perhaps counterintuitively to some, we believe the most effective way to fulfill this purpose—far better than what is considered “safe” short-term government securities—is through thoughtful allocations to risk assets.

Our perspective hinges on differentiating between what we describe as “fixed principal” assets and “fixed positional” assets. Treasury bills, for example, are fixed principal assets; the yield paid to investors is fixed, as is the nominal value of the bill at maturity. Considered risk-free due to its explicit US government backing, every T-bill held to maturity has paid its investors exactly what was promised, no more and no less. While such stability has its merits, it also has its drawbacks; as the supply of these assets varies over time with the funding needs of the government, their real, inflation-adjusted value at maturity is unknowable.

In contrast, equities are examples of fixed positional assets; while their yield is variable or nonexistent and their terminal value is unknown, their relatively fixed supply historically has enabled them to participate in the nominal drift of the economy. As nominal prices have increased alongside the expanding money supply and growing government debt, equity prices have kept pace. We believe this effort hinges on identifying companies that own assets with scarcity value—whether tangible or intangible—that have the potential to provide long-term advantages in profitability and durability.