Portfolio considerations regardless of the investment cycle:
- Do you have adequate diversification so your client’s portfolio can perform across different cycles and not just in a macro driven environment? This includes investment styles such as growth, value and passive.
- What role does each manager or investment in your portfolio play? Is it market exposure? Is it risk control? Or is it a high returning strategy?
- Know your factor exposures by understanding the characteristics of the managers in your portfolio and if possible, measure the exposures quantitatively.
Are you being too defensive?
Market conditions are shifting, presenting advisers, their clients and astute investors with new investment opportunities.
According to Lonsec Investment Solutions Chief Investment Officer Lukasz de Pourbaix, this makes it timely for advisers and investors to review their portfolios and make sure they are well positioned for the shift in market conditions.
“There are more individual stock opportunities in the market,” he said. “There will also be greater dispersion in fund management performance as those active managers that have a strong track record and ability to pick individual stocks will certainly in our opinion shine in this market environment.”
Speaking at a Netwealth webinar titled ‘Is up the new consensus?’ de Pourbaix noted there are several indicators pointing to this shift in investment conditions.
These include consumer sentiment, which even in an environment of quantitative easing where asset prices have been propped up, has been quite low.
Commodity prices have also improved. Sometimes regarded as a leading indicator for economic strength due to its use in industry and household appliances, copper prices have seen an uptick in recent times.
Another indicator is a reversal in the leader board in terms of the performance of different types of stocks.
While the defensive stocks such as consumer staples have been clear winners in recent years, in more recent months, the pro-cyclical sectors such as materials, resources and banks whose returns vary with economic activity, have outperformed the more defensive sectors.
These factors are making the performance of growth versus value stocks quite stark. Value stocks tend to trade at a lower price relative to their fundamental, while growth stock tend to trade at premiums reflecting the projected ongoing strong growth of those companies,
“One of the key things we are noting is that if you think about growth, it has certainly been the winner over the past five years or more,” said de Pourbaix.
“We are noting that value style investing has been the winner in more recent times.”
According to global research provider Style Research, over the last 12-months sectors like materials and energy have outperformed the more defensive style sectors such as healthcare.
Despite this, de Pourbaix warned against changing portfolios to try and time an inflection point in an investment style.
“As we've seen, growth has been the winning strategy for well over five years despite growth looking expensive in certain regions and sectors. Conversely, value has been cheap for several years and it's only until recent times that it's come to fruition, so trying to time those turning points is difficult.”
So, what factors are investment professionals looking at to make their investment decisions?
de Pourbaix said Lonsec is currently looking at several factors including valuations, business cycle, sentiment, momentum and the implications of the election of Donald Trump.
He said while valuations are currently looking fair value to expensive, Lonsec is reducing its under-weight exposures to equities, while at the same time remaining cautious on valuations.
“We still have a meaningful exposure to alternatives, and are still holding a little bit of cash. But we are really looking to deploy that over time as we see some of these signals improve over time.”
The geopolitical landscape is of course changing, following the election of US President Trump. Despite Trump having many pro-growth type mandates, including cutting corporate tax rates and reducing regulation, he also has a strong position on protectionism, so de Pourbaix said it is unclear how this will transpire.
This is because should Trump not be able execute on some of these pro-growth policies, the market could see this as a negative and retract.
Another key factor Lonsec is considering is the move away from unconventional monetary policy.
“We thought that rates would rise a lot earlier than they did. But we are now probably seeing some real catalysts for that rate rise. We've seen some positive economic indicators and certainly, the central banks are more willing now to rise. This will have material implications for asset prices, particularly interest rate sensitive asset classes such as fixed interest.”