Managing and advising on our clients’ investments is becoming increasingly complex. In a world of zero to negative interest rates, opportunities often arise in strategies, asset classes, regions or sectors that have been less of a core focus to most investors in the past.
Investing in a low-interest-rate world
Conservative savers are being challenged in a world of low to negative interest rates. Central banks’ increased buying of government bonds has made sovereign debt a scarce and pricy asset. According to our average return expectations, achieving a 4% nominal return now requires a 50% equity exposure. A few years ago, the same return took less than half of this. Higher equity exposures also bring larger drawdown potential.
Hedging these risks is of great value to an investor looking to navigate the current markets. This can include countering the risk of falling equities (our Risk Return Engineering) or offsetting rate rises on your lending costs or bond portfolio using interest-rate swaps (our IRS offering).
Core vs. satellite investment
At its simplest, this involves combining the core part of a portfolio (often cash, bonds and large cap equities in the larger markets) with a satellite part made up of more niche, potentially riskier, investments. It’s about constructing a portfolio that combines cheap index tracking exchange-traded funds (and therefore exposure to the key indices) with alternative strategies that provide uncorrelated returns to those same indices.
It can also involve taking on some illiquidity in the satellite part to provide an additional income expectation, while the core investments remain diversified and liquid. Identifying the secular themes, illiquid investments and uncorrelated strategies that could complement more traditional investments as satellites can be extremely valuable.
Diversification as a need
Increasingly, investment opportunities come in niche asset classes (e.g. emerging market debt), in sectors that might not be that largely represented in your domestic market (such as tech for a European investor) or in specific sub-asset types (such as corporate hybrids in European debt).
An investor cannot choose to diversify solely within their domestic market. So diversification brings forex risk, which is as much of a challenge as an opportunity. Forex can act as a multiplier of an investment’s risk (particularly in fixed income) or as an alternative source of diversification. This is especially true in equities. Think about the outperformance of the UK stock market after Brexit as the GBP fell. The lower value meant better earnings for exporters, benefiting the stock market.
Our advisory service will help you to identify forex risks and opportunities and to implement solutions in line with your investment needs.