Monday, 18 July 2016

Are you harming your portfolio by ‘buying the dips’?

Over the last year high looking valuations have led investors to pile into low-quality investments.
Piling into low-quality cyclical stocks just because a market correction has brought them down to more attractive valuations is one of the biggest mistakes investors can make in the current environment. The resources and energy sectors are prime examples of where investors need to be careful, as the bounce in these areas over recent weeks could be the result of overconfidence as economic data stabilises.

The growth versus value argument is often at the forefront of investors’ minds and recently, given that the FTSE World Growth index has continuously outperformed the FTSE World Value index over one, three, five, 10 years. While some investors believe this could continue, many others believe in the ‘mean reversion’ theory, which means it is only a matter of time before the scales rebalance and value starts to outperform.

Many investors are simply looking at a cheap valuation but perhaps haven’t analysed whether they’re buying good long-term value or whether they’re cheap for a very good reason. Although the concept of ‘buying the dips’ is often used as an investment thesis, I often caution against placing too much emphasis on this when building a portfolio. Instead, investors should hold a combination of value and momentum stocks in order to spread risk and maximise long-term returns in their portfolios.

Instead of buying based on market valuations relative to historical pricing, investors are better advised to establish an asset allocation strategy at outset which suits their long-term investing goals and then rebalance back to this position at set intervals, regarding of what the market is doing at that time. This removes the emotion and psychology from investment decisions.

Another danger related to impulse-buying deep value plays is that investors can find themselves enticed by the high yields they have on offer. For instance, more than 10 per cent of the FTSE 100 index – which is of course heavily weighted in mining and oil & gas stocks – is yielding upwards of 6 per cent.

However, yields increase if the value of the underlying holding falls as well as if the dividend payments simply rise. To avoid this risk investors need to keep thinking back to a stock’s cash flow and whether it’s sufficient to pay the dividend that is on offer. Perhaps the market should be sending a message to you as an investor that obviously if a dividend yield is high, it’s high for a reason because the return you’re getting is above-normal in terms of the dividend yield and so consequently you’re being paid because the risk is higher.

We believe the market areas that will continue to do well over the medium term are technology companies, telecom businesses and consumer stocks that are producing products people will want or need over a longer term time scale.

Too many investors place too much emphasis on short-term performance, whether it’s buying shares or funds because they are already delivering or strong performance or targeting those that are in doldrums but are cheaply-valued.

By adopting either of these approaches, investors are in danger of taking too much risk. They could buy shares or funds just as they peak or invest in areas which could be depressed for some time to come.

The reality is that nobody can consistently call short-term market movements. The best approach is therefore to take a long term perspective, try not to be too clever and try not to be overly influenced by short-term performance.

Friday, 1 July 2016

Why multi-asset investing works.

Multi asset investing can be easily arranged through your existing portfolio of investments but becoming ever more popular are multi-asset funds that are able to invest across the full range of asset classes and may include equities, bonds, property and cash. A multi-asset approach provides a greater degree of diversification than investing in a single asset class. The benefits of diversification within multi-asset strategies are the investments being spread over a broad range of strategies, styles, sectors and regions which can help cushion the occasional shocks that come with investing in a single asset class. This enhances the potential for investing in the best-performing asset class and reduces the impact of the worst-performing asset class.

Many investors look to multi-asset funds to provide a lower-risk investment than a pure equity fund, but with greater prospects for growth than a pure bond fund. Amid market volatility in global markets, multi-asset funds, which were once considered institutional or pension fund-oriented products, are gaining traction among many individuals as part of their investment portfolio.
The reasons are many for the newfound popularity. The speed at which fund managers can implement changes in asset allocation is faster compared to traditional funds, along with the ability of the fund to choose from a wide variety of asset classes anywhere in the world. The third reason is the ease with which individuals can invest.

In the current market environment of subdued global growth and limited return expectations across a number of asset classes, the main benefit of multi-asset investing relates to the greater choice and flexibility embedded in the investment process compared to single-asset class funds. Fund returns will depend a lot more on alpha generation (returns above the market average) as investment opportunities will present themselves in a much more scarce fashion than in the past.

Because growth is scarce at present and income is hard to generate without additional risk. That means an income-seeking investor is facing the worst of both the worlds. If you are a single-asset class fund manager, then you can either manage income or volatility. This is where multi-asset really aims to provide an outcome that investors are looking for.

Most investors understand the advantages of multi-asset investing; having some investments that should in theory go up in value when others go down makes pretty obvious sense. The trouble in very volatile markets — as we saw during the 2008 global financial crisis — is that different kinds of investments can suddenly all go down together, even if they would ordinarily be expected to perform differently. The return expectations based on the current economic conditions have come down a lot. Every additional risk is no longer producing the additional return that it used to. It’s a big dilemma that we are facing.

A lot of asset classes are in neutral now as the growth is scarce and we think there has been a big shift in the way investors should look at markets. With the US Fed finally embarked on an interest rate hike, you need to be a lot more careful in identifying where the opportunities are. With the growth outlook so subdued, it’s no longer one strategy that would generate strong returns which is where a multi asset strategy comes to the fore.

True diversification is hard to find but exposure to relatively scarce asset types, which perform in a way that is truly different from the major traditional asset classes, like company shares and bonds can help a multi-asset strategy weather future volatility. Investors who are looking for more stability could therefore consider a multi-asset strategy appropriate for their individual risk approach.