Investment News - February 2016
Global markets continue to be unsettled and we have recently witnessed significant correlation between stocks and oil, i.e. commodities and shares moving in the same direction at the same time. A recent article on Bloomberg notes that there has been increasing correlation between any number of different asset classes over the past two decades.
Why should this be a concern? Well, Modern Portfolio Theory (MPT) (introduced by Harry Markowitz back in the 1950’s) suggests that blending uncorrelated assets is the best way to reduce volatility and risk. A problem often cited with this theory is that it relies on the correlation between different assets being stable. It became very clear in 2008 that this is not the case when diversification did not protect typical portfolios from great harm.
Over the past few years we have seen increasing correlation between fixed-interest securities (“bonds”) and shares. Blending shares and bonds in different percentages to control risk is just about the oldest form of portfolio diversification there is. You will find it used in most traditional “managed” funds. This should be a cause of great concern to most retail investors who are trusting insurance companies to look after their pension and investment funds.
So what is the answer to increasingly volatile markets? Does “buy and hold” still work for the average investor?
Our answer is that retail investors need to “wise up” and stop lining the pockets of the big institutions. Modern investment portfolios need to be managed in a way that reflects the underlying market conditions. Stop buying the asset classes that the institutions are dumping. Stop following markets all the way down just because “they’ll come back eventually”.
In modern “risk on, risk off” markets, good stocks plummet along with the bad. Perhaps worse, the huge inflows into index-tracking funds means that the bad companies get bought on the way up as much as the good companies. That can never be a recipe for success over the longer term.
At HDA we believe that you should use genuinely “market-neutral” assets if you want to dilute market risk. That requires detailed “under the bonnet” analysis of the options available at any given time. We also believe that most investors should be “market-neutral” when markets offer little or no value. The only alternative is effectively to “gamble” and we all know that the House eventually wins.
If you really want to “ride the roller coaster”, avoid the mainstream and look for investment ideas that will give you an edge over the longer term. A “thematic” or “specialist” approach will increase risk (and probably running costs) but these should not be concerns if you are looking for genuine outperformance over a long period of time. It goes without saying that this type of investment requires detailed research and hands on management – and comes with no guarantees …
At HDA our Blended Strategies are a continuous “work in progress”. We have been able to demonstrate genuinely market-neutral performance from the purest versions of our Absolute Return portfolio. These have offered exceptionally flat returns during a period of significant market volatility.
Our Dynamic Portfolio has also proved its worth by protecting investors from market volatility. The portfolio has been less than 15% invested in equity markets since last August and currently has no direct equity exposure at all.
Our Adaptive Portfolio is now live and we are extremely excited about the possibilities that this offers for longer-term growth at a fraction of normal market risk.
Finally, our new Growth Portfolio (on Fusion Wealth) has adopted a number of global themes and offers excellent long-term prospects for the higher risk elements of our blended models.
Please remember that the value of investments may fall as well as rise. Past performance data may be useful for comparison purposes but is not necessarily a guide to the future.
For further information please contact us.