Investment Strategies
Get Active In Today's "New Normal" Investment Environment - Fidelity International

A major international asset management house addresses how clients should think about asset allocation and tactical strategies in light of the current market upheavals.
We hope readers will be grateful that this news service isn’t
pumping out endless content about coronavirus – we will be
writing more articles later this year about the implications for
the wealth management industry from the changes likely to come
about, and welcome ideas. For the moment, however, we want to
focus on where we can add value to a specialist audience rather
than driving you to distraction. So we will be sparing in our
reporting. To that end, let’s consider certain investment and
risk management strategies that need to be considered in the
present environment.
To some degree wealth management is about judging risks and
informing clients on how to consider risk (not necessarily the
same as volatility). And as shown in last year’s article series
about behavioural finance, we are learning a lot at the moment
about how human behaviours can turn very fast in crisis
conditions. Certain “herd” actions can be foolish with hindsight.
Let’s hope the insights from
behavioural experts can be applied in the present
environment. Again, this is a topic we want to explore in greater
detail once some of the most immediate upheaval has – hopefully -
calmed. Stay tuned.
Here are some comments from an Asia perspective via Fidelity
International, the asset management house. They come from Paras
Anand, chief investment officer, Asset Management,
Asia-Pacific.
New normal
In periods of market volatility like this, especially after a
long rally, it is normal for investors to narrow their time
horizons. Capital preservation becomes the primary consideration.
However, to paraphrase Warren Buffett, whenever fear becomes the
dominant sentiment, long-term investors need to think about where
to be greedy.
There is, first, a distinct risk in continuing a simple chase for
yield or targeting “low volatility” securities. While these have
been dominant themes in markets for a decade, such “expensive
defensives” may in time be more vulnerable than is currently
appreciated - especially if central bank intervention is seen to
have little impact on demand in the real economy, exposing a
small margin of safety.
Consider the emergency rate cut and other measures the Fed
announced on Sunday. While these actions will help to ease the
liquidity strain in funding markets, they will not do much to
counter productivity losses as measures to contain the Covid-19
pandemic escalate. The US and other developed economies are
likely in time to introduce more fiscal measures to stimulate
their economies over the medium term. It is also not a given that
Asian central banks, China in particular, will follow the Fed
playbook to move policy rates toward zero.
In a volatile environment like this, how should investors
position themselves? Here are three long-term calls to
consider:
1. Get active
We have seen passive strategies boom in terms of flows over the
last decade and they now constitute a significant part of the
ownership of the markets and an even greater part of daily flows.
A period of rising asset prices boosted by easy monetary policy
has made this a smart allocation, especially in US markets. Now,
however, it’s worth considering whether active strategies should
become a greater focus for investor portfolios. There are three
underlying reasons for this. First, periods of higher market
volatility will always strain the ability for trackers to
accurately reflect market return, so there is a higher chance
these strategies return less than the benchmarks that they are
replicating. Second, an extended period of popularity for passive
strategies (and other forms of factor or rules-based investing)
has meant a greater focus for active managers on clarifying their
processes and improving portfolio construction, while
incorporating sustainability measures to more holistically assess
corporate risk: in short, the value proposition has had to
respond and improve. Finally, after a period of extensive
dislocation between asset prices and underlying valuations, the
prospect for active returns has never looked better.
2. Look to Asia
Asia, including emerging Asia, is an undeniably attractive
allocation for the coming decade in several respects. To start at
the simplest level, today Asia represents a much greater
proportion of global economic output than is reflected in most
global equity or bond indices, but its clout in terms of both GDP
and share of investment allocations will rise at a significantly
higher pace than the global average. As Keynes said, in the short
term the market is a voting machine, but in the long term it is a
weighing machine. Even in the context of recent news flow, there
are several short-term positive drivers that are becoming more
evident.
First and most obvious is that a period of lower oil prices will,
over time, lead to a benefit for industry and consumers across
the region, especially for net oil importers like China. Second,
a decade long rise in the value of the US Dollar has also placed
a funding strain on many Asian economies. This now appears to be
turning, and recourse to additional monetary and fiscal stimulus
by the US should add to this headwind turning into a tailwind for
the region. Finally, as the prospects for Asia as a whole are
increasingly tied to China, recent concerns over the state of the
Chinese economy, the impact of the Covid-19 outbreak and trade
wars have led to lower valuations across the board.
3. Rethink market classification
Digging into what is going on more broadly in politics,
geopolitics and the greater divergence between different
economies globally, the way investors identify and allocate to
different market opportunities looks ripe for change. Traditional
market and sector classifications are looking increasingly clunky
as a way of trying to determine preferred (or less preferred)
exposures.
This is especially true when it comes to “developed markets”;
what we see is that the country where a security is listed has
increasingly little to do with its scope of operations, sources
of revenue or its primary trading currency. The UK is a good
example here, where close to two thirds of the income earned by
companies on the FTSE 100 is from overseas operations or
subsidiaries. Similarly, the rapidly changing nature of the
corporate sector makes industry-based classifications harder.
This, compounded by the impact of historic decisions of
membership, are making sectors less of a natural grouping today
versus at any point in history.
As investors think about navigating this period of turbulence,
some of the best opportunities are in themes with secular growth
that cut across industry and market classifications, be those
around emerging markets, consumption in China, innovative
technologies or the drive towards sustainable investing.
Investing around themes has, in many cases, justifiably come in
for a lot of criticism as some of the most resonant ideas can be
very specific (e.g. “robotics” or “shale oil”). Think of the
thematic approach more as an interesting way to redefine the
larger opportunity set, rather than a way to mine a narrow
seam.
None of the above is meant as a guide to timing the markets. But
in any point where the market hits an air pocket, the reactive
selling (and buying) can make the longer-term opportunities
harder to divine. These are three that stand out amid the noise.
To contact the editors, email tom.burroughes@wealthbriefing.com and jackie.bennion@clearviewpublishing.com