Henry Wong of BEA Union Investment Management Limited explains how investors should approach today’s challenging environment.

Date: Dec 2011

Tags: Risk, Portfolio construction, Asset allocation, Bonds

• Bottom-up investing is the way to go in today’s markets, because investors need to be sure of getting their coupon on time and of principal repayment on maturity of the bond
• On a regional basis, the banks under the supervision of the Singapore, Hong Kong and mainland Chinese governments are still good for investment – but investors should steer clear of banks in Europe and the US
• Simple and straightforward names are the way to go for investors, plus they should stick with notes which are senior in the capital structure
• Investors need to be aware that in highly-volatile markets, the cost of transacting increases, and these costs are going to get higher and higher in the future

According to Henry Wong in an interview, risk is definitely a concern for investors, no matter which asset classes they are invested in at the moment

This is because there is a crisis not only in Europe, but also in the US, so for bond investments in particular, investors have to be very selective in their portfolio construction, he explained.

Opportunities and what to avoid

For Wong, he sees bottom-up investing as the way to go in today’s markets, because investors need to be sure of getting their coupon on time and of principal repayment on maturity of the bond.

Secondly, he said picking the right sector is very important, For example, he has been generally avoiding the financial sector for quite a long time because it is at the centre of the current crisis.

However, on a regional basis, Wong said he thinks the banks under the supervision of the Singapore, Hong Kong and mainland Chinese governments are still good for investment.

In terms of what to steer clear of, Wong said those banks in Europe and the US should be avoided, given that he is skeptical about potential returns. While he doesn’t think they are necessarily going to default, the kind of risk and volatility involved for investors will be very high, he explained.

Products and structures

Against this backdrop, Wong said simple and straightforward names are the way to go for investors, plus they should stick with notes which are senior in the capital structure, in order to get more protection from market volatility.

At the same time, the shortening of the cycle creates a tricky environment for investors, he added.

While on one hand the cycle is getting shorter and shorter, on the other hand, the trend in the market of deleveraging is not going to be short, he said.

Rising transaction costs

Investors also need to be aware that in highly-volatile markets, the cost of transacting increases, and these costs are going to get higher and higher in the future, predicted Wong.

With fewer market makers and people trading less, he explained, the buy-side spread is becoming wider and wider, therefore investors have to pay higher costs.

In bullish markets, where people think they can get good returns on the upside, they don’t look at transaction costs, said Wong. But in volatile markets with higher hidden transaction costs, they should think twice before churning their portfolio.