Events are incredibly fast-moving currently and every day seems to bring another round of unprecedented circumstances and figures. Here we round up the proactive moves the wealth managers on our panel are making to protect their clients’ investments – and position portfolios for future growth.
We live in extraordinary times. Until recently the US was enjoying the longest run of economic expansion in its history and stock markets were continuing to hit new highs. All was well, or so it seemed.
Until it wasn’t. The global COVID-19 pandemic coupled with a looming oil shock sent the world into lockdown with economic growth a mere memory and a very real and raw emotion as trillions in wealth was eroded around the world. As stock markets took fright, policymakers tried to steady the ship with enormous injections of cash and credit for markets and companies. It remains to be seen which strategies will play out best, but we can look forward to markets recovering in time. They always do.
But what to do now? We asked some of the institutions on the findaWEALTHMANAGER.com panel what they are doing to protect their clients’ portfolios during these turbulent times – and to position them for continued growth looking ahead.
How have portfolios fared in Q1?
To get a sense of how performance has held up – or not – in the first quarter of 2020, we first asked how our wealth managers’ “balanced” portfolios fared (those sitting in the middle of the risk spectrum). Here, we found performance to range between -12% and +4% over the first three months of the year.
With the broader markets doing much worse, our panel institutions have managed to avoid some very large drawdowns in comparison. As ever, proper diversification – investing in a broad mixture of asset classes, markets and instruments – has played a key role in the creation and maintenance of robust portfolios.
As ever, proper diversification – investing in a broad mixture of asset classes, markets and instruments – has played a key role in the creation and maintenance of robust portfolios.
Market-leading wealth management balances the strategic and tactical, spanning the short, medium and long-term perspectives, however (which is why it is very much a team effort). As our research confirms, a huge amount of expertise is going into managing clients’ portfolios currently.
Carefully reading the rally
Readers will likely have heard much about the “relief rally” that’s been seen, with S&P rising 25% from recent lows, and similar rebounds in indices like the FTSE and Euro Stoxx 50. But while impressive, the possibility of lows being re-tested at a later date remains. Given exhausted monetary policy versus the enormity of the economic shock facing us all, it is likely growth will be stunted for some time.
Here, our panel of wealth managers are being highly proactive and pragmatic – namely by using the market rises as a way to raise cash which can then be redeployed to buy back in if and when market falls return.
Drip-feeding money in
The economic uncertainty ahead means that wealth managers have become even more wedded to the principle of pound-cost averaging i.e. forgetting the fool’s errand of trying to time the markets too precisely and instead drip-feeding money in to smooth over volatility. This is also helping them keep a keen eye on liquidity (investors’ ability to sell assets back into cash), which has been very poor in the markets recently.
The economic uncertainty ahead means that wealth managers have become even more wedded to the principle of pound-cost averaging i.e. forgetting the fool’s errand of trying to time the markets too precisely and instead drip-feeding money in to smooth over volatility
Large cash sums are being put to work in tranches spaced well apart for added safety. Discipline has also been tighter than ever, with set sums deployed on set dates agreed with investors. As we recently explained, taking emotion out of the equation is the bedrock of sound decision-making in difficult times.
Life being “on pause”, many people are falling into the trap of following the news a little too closely and watching their portfolio almost minute by minute. With volatility so wild, that is self-defeating and terrible for your peace of mind. Nobody can be an expert in every area of investments, which is wealth management advisers have whole research teams behind them. Engage the right firm and you can trust that every variable is being weighed up by true experts in their field.
Taking a long view on sectoral and regional trends
There is no doubt a changed world will emerge from this crisis, and another reason our wealth managers are keeping cash on hand is to be able to swoop on specific future winners as they emerge. Buying in must be done wisely, but without undue delay: markets will start to price in a recovery much sooner than investors may think – and likely while the news flow is still grim.
Buying in must be done wisely, but without undue delay: markets will start to price in a recovery much sooner than investors may think – and likely while the news flow is still grim
Sectors our wealth managers view as well positioned to take advantage of the eventual recovery span technology (including ecommerce, digital entertainment, cybersecurity and fintech), infrastructure, renewable energy and, of course, healthcare.
But wealth managers are also busily examining other sectors and themes that could provide a big boost to portfolios. One highly convincing thesis we heard from several firms is that gold miners could benefit hugely as the price of the precious metal increases due to uncertainty and the cost of extraction falls due to energy prices dropping. In the same vein, Japan is getting a lot of attention since it is a huge importer of oil for its manufacturing. Despite moves to cut production, oil prices keep falling due to chronic oversupply as the developed world remains on lockdown. Contracts to buy and take delivery of oil at specified dates can usually be traded like stocks. With storage facilities full, traders can’t get rid of them fast enough.
Many vitally important investment themes will be far from obvious to those without institutional-grade research capabilities – as will the distinction between undervalued and understrength assets generally
Undreamt-of phenomena like US crude futures tipping into negative territory for the first time ever underscore what strange times we are living in. Many vitally important investment themes will be far from obvious to those without institutional-grade research capabilities – as will the distinction between undervalued and understrength assets generally.
Quality the guiding light in investment selection
The market rout has taken good and poor companies down in value together, but this very fact means that investors shouldn’t be bargain-hunting indiscriminately in their haste to ride the recovery up (something the inexperienced often fall prey to).
As with previous crises, distressed assets have become a focus for those seeking higher returns and the potential is underscored by new investment vehicles being launched – including one particularly interesting distressed assets fund developed by one of our panel firms. As they remind us, the potential for outsize returns is down to simple maths: what goes down 68% will go up 190% when prices return to where they came from. This is an area definitely best left to the experts, however.
Some companies have had weaknesses rightly exposed so our wealth managers have been careful to avoid investing in “bombed out” stocks indiscriminately, particularly those with higher debt/leverage levels. Very hands-on managers are certainly seeking bargains selectively, but the overall focus is on buying high-quality companies with strong balance sheets that clients can confidently hold for a long period. As we know, “churning” portfolios too much increases costs and rarely adds up to profitability, and is something professional firms avoid.
Some companies have had weaknesses rightly exposed so our wealth managers have been careful to avoid investing in “bombed out” stocks indiscriminately, particularly those with higher debt/leverage levels
Another part of this quality play has been several firms reducing exposure to tracker or Exchange-Traded Funds. These low-cost instruments may be an easy option in happier times on the basis that a “rising tide raises all ships”. Yet investing more specifically in individual companies is now favoured as a way to increase upside potential and improve transparency. Investors rightly want to know exactly what they are exposed to.
The form of fund holdings is crucial too
Interestingly, our wealth managers are also spotting bargains among active funds. When the same fund come in both open and closed-ended versions, they are exploiting discount opportunities in the latter. It is often under-appreciated how much of a difference the version or share class of a fund makes to returns. Larger institutions are able to offer access to institutional share classes which are far cheaper to own than the retail version others are limited to.
It is often under-appreciated how much of a difference the version or share class of a fund makes to returns. Larger institutions are able to offer access to institutional share classes which are far cheaper to own than the retail version others are limited to
Mitigating currency risk is another area where wealth managers excel and so our panel of firms are also paying closer attention than ever to the impact movements can have on fund holdings, particularly given the recent rally in the US dollar against sterling. Hedged share classes are therefore very much in favour.
Bolstering portfolios with bonds, but with a very broad view
The rule still holds true that bonds are an effective diversifier to equities, generally helping to offset losses when stocks drop. But any bond strategy needs to be extremely well thought-out, our panel firms remind us.
On the sovereign side, we heard that firms are taking advantage of a current low inflation environment and expectations of increases post-crisis. One popular five-year play is to invest in US Treasury Inflation-Protected Securities on the basis that these currently under-price inflation expectations and will surge once market volatility subsides.
Meanwhile, central bank support for corporate bond markets is leading wealth managers to view the risk of default to be fairly remote – and therefore see high-quality, short-duration corporate fixed income investments as having good potential for positive returns as well as yield.
Predicting dividend streams with any accuracy is a highly skilled analytical task. Therefore, those reliant on dividend income (as retirees often are) will be particularly in need of both tactical and strategic advice
Broadly, although the dividends outlook is dire for now, our panel wealth managers expect a relatively swift rebound next year once conditions normalise. They therefore continue to espouse long-term strategies of selecting companies with good dividend yields, dividend growth and strong balance sheets. Predicting dividend streams with any accuracy is, however, a highly skilled analytical task. Therefore, those reliant on dividend income (as retirees often are) will be particularly in need of both tactical and strategic advice.
So, is your wealth manager doing enough?
As we have illustrated, there is an incredible amount of information to be weighed across markets, sectors, asset classes, instruments and currencies (and all of the sub-categories of them too). If making the right calls seems incredibly complex, frankly that’s because it is.
The best wealth managers are up to this challenge though and are pulling together huge amounts of expertise to make intelligent decisions for their clients. They are being highly proactive, while others are merely reactive.
The best wealth managers are up to this challenge though and are pulling together huge amounts of expertise to make intelligent decisions for their clients. They are being highly proactive, while others are merely reactive
Look back to survey the damage is not enough. As we recently explained, your wealth manager should be telling you exactly what it is doing to protect your investments going forward and make the most of emerging trends. If it is not, why not use our smart matching tool to see what a leading wealth manager could be doing for you?