Diversification and investing in quality are crucial in uncertain times, Fidelity Worldwide Investment’s white paper finds
HONG KONG, 29 November 2012 - In the recent white paper ‘Strategies for Turbulent Markets’, Fidelity Worldwide Investment (‘Fidelity’) examines how investors can improve and diversify their portfolios to weather turbulent markets, with a particular focus on ‘safe havens’ and alternatives. Given that market volatility is likely to remain in 2013, amid the US ‘fiscal cliff’ issue and a continued period of austerity and deleveraging within the Euro-zone, this paper is particularly topical.
Fidelity’s paper finds that sovereign risk has caused a polarisation of the government bond market, creating concentration and liquidity risks among a shrinking set of over-valued safe haven assets. This has led investors to consider broader exposure to high-quality bonds beyond domestic or traditional government issuers. Sovereigns such as Australia, Canada, and Switzerland, for example, can bring about sensible diversification and introduce currencies that reduce overall portfolio risk. Similarly, with the non-financial corporate sector in good balance sheet health, high quality investment grade corporate bonds, issued by strong multinational companies, are also a good source of safe havens.
Strategic portfolios investing across markets and bond classes can improve diversification and the risk-return profiles of portfolios by freeing up managers from traditional benchmarks. At present, many traditional market-weight bond benchmarks encourage investment in the most heavily indebted areas.
Mark Talbot, Managing Director, Asia Pacific ex-Japan at Fidelity Worldwide Investment said: “Financial markets have become less predictable. As a result, we have observed investors’ increasing preference for less risky, or rather what are perceived to be less risky, fixed income assets. However, the low or even negative real yields for many safe haven bonds could mean low returns or a higher chance of capital loss for investors. As such, holding a diversified portfolio has become even more crucial in the current volatile environment. This paper is a valuable contribution to the current debate of how to improve the risk/return profiles of portfolios in these uncertain times.”
In terms of equities, investing in “quality” or companies with strong balance sheets, solid returns on equity, good free cash flow generation and low levels of leverage can offer a relative safe haven in uncertain times. Such companies can also improve their market share in times of crisis by making acquisitions at attractive prices.
Mr. Talbot also observes: “Equities provide dividend income, and over the long run, compounded income is a powerful driver of total returns. Fidelity believes that having the latitude to shift portfolio exposure based on anticipated changes in the economy can allow managers to capture the best opportunities over time, making the most of our research insights.”
In turbulent times alternative investments can be used to generate return profiles that are uncorrelated to those of traditional assets, thereby offering diversification and opportunities for risk control. However, in times of real crisis, correlations can rise as negative sentiment creates general selling pressure that indiscriminately impacts almost every asset class. As such, Fidelity believes that consideration must be given to the nature of the assets held and the investment time horizon.
Daisy Ho, Head of Institutional Business, Asia ex Japan at Fidelity Worldwide Investment, said: “Investors cannot completely immunise a portfolio from market volatility and indeed, as depressed valuations create potentially good entry points into assets, avoidance of all volatility is not in itself a sensible investment objective. However, careful selection of the underlying components in a portfolio and diversification can mitigate the extent of losses in negative markets and provide better prospects for attractive risk adjusted returns.”
The white paper also takes a look at the reinsurance sector and trend-following strategies as two case studies which provide interesting opportunities for investors looking at alternative return streams. Both offer the potential for attractive risk-adjusted returns but as Fidelity points out, careful manager selection is crucial.
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About Fidelity Worldwide Investment
Fidelity Worldwide Investment is a global leader in asset management, providing investment products and services to individuals and institutions in the UK, continental Europe, the Middle East and Asia Pacific. Established in 1969, the company has over 5,000 staff in 24 countries and manages or administers client assets of US$289.4bn. It has over 7 million customer holdings and manages around 700 equity, fixed income, property and asset allocation funds. The company’s fund managers receive research from one of the largest proprietary research teams, based in 12 countries around the world. Fidelity Worldwide Investment is an independent asset management company which is privately owned.
Data as at 30 September 2012
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