Victoria Ip, managing director and Asia Pacific chief investment strategist at Merrill Lynch Global Wealth Management, reveals some of the opportunities and approaches in the current landscape for private clients to manage their portfolios, looking at ways for them to generate income as part of how they adjust their asset allocations.

Date: June 29, 2012

Tags: Merrill Lynch, Asset allocation, Portfolio construction, Income, Equities, Mutual funds, Hedge funds, Private equity

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The importance of strategic and tactical allocations is even more critical in an investor’s path of wealth management now.

Our firm uses two approaches broadly, which are different but not exclusive of each other. As opposed to the conventional approach to asset allocation where there is a high reliance on past history to come out with the strategic asset allocations, we have incorporated our estimates of how the future looks in terms of return, risk and correlations.

The other approach is dynamic asset allocation, which harvests short-term investment opportunities while maintaining a focus on achieving a client’s long-term financial goals.

What can clients do in this environment to generate income?

Corporate balance sheets are very strong and profit margins have continued to surprise to the upside. Our studies show that structural changes driven from globalisation, lower borrowing costs and cheaper wages are all leading to more resilient margins than the market expects.

Our view is that although the macro environment is fluid, specific industries and companies are still bringing in high-cash profits, especially in large-cap stocks as supposed to small caps.

With that backdrop, generating income via corporate bonds, dividend yield-growing equities and REITs are good choices. Those investors with long-term views and who can stomach the volatility can look to high-yield bonds from improving balance sheet strength and emerging market debt from continued economic growth and better finances.

What interest do clients have in buying funds?

Our clients have been strong supporters in investment funds, which is particularly important in this environment of high volatility.

The risks of having a concentrated portfolio of direct holdings are are acute now than normal times.  The ability of allowing the managers to move nimbly across sectors or assets is as important as to be able to make decisions in a policy-driven market like this.

What appetite do your clients have in investing in hedge funds or private equity?

Our clients do have exposure to hedge funds, and we actively recommend the types of hedge funds for them to participate in because the style diversity and performance differences can be very large.

As for private equity, we like US real estate, particularly with the housing market having bottomed, so this represents an attractive area for long-term growth. This should benefit from improving economic conditions, slow but declining vacancy, improved lease rates, and the lack of lack of new supply for at least the next three years.

In the US, the multi-family segment remains the strongest, with the industrial and office segments showing signs of recovery as well. 

Should equities still be the cornerstone of Asian portfolios?

While equity market performance has been disappointing because of the size and the duration of the current de-leveraging cycle, it is still the one of the most liquid and transparent asset classes.

We advise our clients not to ignore equities because while they may challenged in the short term, they have cheapened substantially and the long-term prospects remain positive.

The importance is not to desert the asset class but to compliment with the right investment strategy, whether it is from a protection / participation perspective, deep value / distressed angle, or focusing on companies that would still do very well in a modest growth environment because they are either the market leaders or are in a secularly-upward industry.