Clients’ investment portfolios are being designed to be resilient across multiple economic cycles.
Wealth managers have been adapting the investment strategies of their clients’ portfolios against a conflicting background of easing monetary policy and rising geopolitical tensions in the past few months.
After a period in which central banks had to raise interest rates to combat stubbornly high inflation as war in Ukraine raised food and energy prices, rates have now plateaued or started to fall — even though conflict in the Middle East has intensified. “We find ourselves in interesting times, where some risks are actively receding but others are insidiously creeping up,” says Tom Sparke a portfolio manager at Progeny Asset Management.
He notes that, despite the numerous risks that remain, stocks have rallied impressively of late and central banks have not veered away from cutting interest rates. This may ensure that investors continue to benefit. Sparke points out that, historically, the start of an interest rate cutting cycle has been a very fruitful period for both bond and equity investors.
For this reason, he is sticking to his core investment principles: buying into companies with high-quality balance sheets, holding robust fixed-income assets, diversifying a portfolio, while also being “mindful of the risks of being too fearful”.
One strategy Sparke has been eyeing in the current climate is focusing on defensive assets, such as bonds and gold — because of the former’s potential to provide a steady fixed-income stream over the longer term and the latter’s to provide a hedge against geopolitical risks. He believes sovereign bonds, in particular, offer good protection in the current tumultuous times.
John Wyn-Evans, head of investment strategy at Investec Wealth & Investment (UK) has also introduced more fixed-income assets into clients’ portfolios in recent months. He says fixed income is particularly popular with UK clients as domestic government bonds, or gilts, are not liable to capital gains tax. This makes the purchase of low coupon short-dated gilts an extremely attractive alternative to holding traditional cash deposits.
“If growth does deteriorate in the face of ‘higher-for-longer’ interest rates,” says Wyn-Evans, “then fixed-income assets offer a more attractive insurance policy than they did for much of the last decade.”
He explains that longer-dated government bonds now offer more attractive income than they have for many years and also the potential for capital gains in the event of a non-inflationary economic slowdown.
But Wyn-Evans is not entirely risk averse. “A core portfolio should still be largely invested in equities,” he says. “Although there is the potential for volatility ahead, equities have proven themselves to be the best provider of compounding returns over time.” However, he adds that “investors facing short-term liabilities would, as always, want to consider owning more cash and short-dated government bonds.”
One of the other most important considerations for wealth managers is time, says Colleen McHugh, chief investment officer of Wealthify. “You can’t build portfolios based solely on the latest economic data,” she warns. “That’s just looking in the mirror. Instead, you need to look ahead to a range of possible scenarios. Through a rigorous investment process, you can build a portfolio that is resilient across multiple economic cycles and probabilistic outcomes.”
Hence, when creating an investment plan for the current economic and geopolitical climate, managers are looking to the longer term, as well. McHugh explains that investing from someone’s 30s through to their 60s gives a wealth manager a 30-year window in which to build a successful investment strategy, regardless of 2024’s interest rate decisions, elections, or wars.
“Your investment allocation should be diversified and weighted towards risk assets like equities — [and] not just US equities,” says McHugh. “[But] incorporate elements of anti-fragility into your portfolio.”
She recommends, for example, “laddering” fixed income investments by holding bonds with different maturities to give the opportunity of reinvestment at better rates, and considering strategies that can benefit from market turbulence.
A longer-term approach is to be favoured, they say, despite the recent focus on shifts in monetary policy. As Gene Salerno chief Investment Officer, SG Kleinwort Hambros argues, the current uncertainty is not unprecedented, and a calm and composed strategy, based on historical research, can serve investors well in the face of short-term challenges.
“The world appears increasingly uncertain and volatile across matters of geopolitics, economic prospects, and climate change but it’s important to remember that this current uncertainty is not especially new,” Salerno stresses. “Rather, the relative geopolitical and economic calm of the past two or three decades has been an outlier — particularly when coupled with what were rock-bottom interest rates by historical standards.”
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