Helen Ng, managing director, head of private clients and portfolio management for GAM in Asia, explains how market volatility and uncertainty have impacted expectations, asset allocation, and the way clients view and run their portfolios.
Date: Apr 20, 2012
Where now are the markets and investment opportunities in today’s new-norm of volatility and uncertainty?
What we see now compared with before the global financial crisis in 2008 is a multi-year problem which has straddled the last four years or so.
During this period, governments have been pumping money into the system to inject liquidity and jump-start economies. Even during periods of recovery we are experiencing a lot of bumps along the way. We need to bear this in mind, while absolute return-style products play an important role under this environment.
We see the global markets, in general, being in a state of recovery from the low-point and in a low interest-rate cycle.
To what extent have Asian HNW investors adjusted their risk and return expectations?
We have seen a big focus on fixed income since 2008, and I have been told by many advisers that clients are now happy with instruments which pay a mere 3% per annum, especially if there is some type of monthly dividend payout.
That highlights how risk-averse investors are at the moment.
However, while investors are shying away from risk, they are on the look-out for various opportunities in high-growth home markets. For instance, we have seen some fund flows gradually – albeit slowly – coming back to emerging markets, especially Hong Kong and China, after the outflows in 2011.
It is also important for investors to measure the relative performance of different products. For example, if a stock such as a large, higher-quality multinational company can provide a dividend yield of around 3% to 4%, and the pay-out is higher than is achievable through a good corporate bond, plus there is also the upside of the equity potential going forward.
How have the ways in which portfolios are managed changed against this backdrop?
Previously, investors might have looked at their managed portfolio once, or perhaps twice a year. Now, it is not uncommon to get calls from clients when market volatility picks up.
At the same time, it is important for managers and advisers to communicate more frequently with investors if certain events happen. For example, if sovereign debt is downgraded, we would communicate with our clients the implications for their portfolios and how our managers have reacted accordingly.
This requires a much more active approach, both in terms of active portfolio management and client communication.
To what extent is the approach of Asian investors more rational today?
A lot of Asian investors are still increasingly focused on local markets. This makes it more difficult for them to understand why a managed portfolio might still be invested in the US or Europe, for example, if they see negative headlines or other news.
However, we look at various indicators to determine which markets are right to invest in, based on fund flows, valuations, long-term potential and other criteria.
It is therefore increasingly important for us to communicate and explain the reasons for these investments.
With many traditional asset classes suffering, what potential do alternatives present clients with in terms of finding the kind of returns they want?
The hedge fund industry has changed a lot since the credit crisis. UCITS III is fast emerging – introducing greater transparency and increased regulation, and providing better liquidity. Asset management houses have come up with UCITS III funds to cater to the evolving investor appetite.
Having said that, some hedge funds haven’t moved towards adopting a UCITS structure, as they are concerned there are far too many regulatory and investment constraints holding off hedge fund managers' delivery. With UCITS funds structures, which allow more frequency in dealing, this might mean that a manager, especially in volatile times, manages on the basis of liquidity rather than on the fund itself.
What other types of opportunities do you see in the alternatives space?
In looking for investments which are truly non-correlated to financial markets, this means thematic plays via specialist funds.
For example, this includes catastrophe bonds, which refer to event risks related to earthquakes, hurricanes and other events. By coincidence, there is a window of opportunity when fund managers can find good investments in this space.
What are some of the things that investors should keep in mind in today’s environment?
The key is to go back to basics and focus on fundamental values. For example, when fund managers look at the price/earnings ratios and are able to identify those companies which are undervalued, this is a way for investors to differentiate good managers from the rest.
Also, investors need to bear in mind the biases they have, such as a herd mentality, so that they don’t automatically go in the same direction as everyone else.
At the same time, fund flows always drive market direction in both ways – overshooting on the upside as well as the downside – so investors should be careful to avoid getting carried away in bullish times, or too panicky in bearish conditions.
Ultimately, in terms of asset allocation, investors need to know where their risks are, and what their risk appetite really is based on where their positions have moved to in recent months and years.