RBC Wealth Management: Better Time Than Ever For Diversified Investment

Max Skjönsberg

25 April 2012

There has never been a better time for investors to be diversified as market sentiment keeps fluctuating between risk appetite and flights to safe havens, says RBC Wealth Management.

At a media roundtable in London, the wealth management arm of Royal Bank of Canada warned about substantial risks that seem to be lingering, stressing developments in the eurozone.

“If we put ourselves back six to nine months, people were thinking that they would be in cash for a while and watch how things unfold,” said Guy Huntrods, head of the advisory desk for RBC Wealth Management in the UK and the Channel Islands. “But here we are, and things have not unfolded; we are still in a fairly awkward situation.”

Cautious opportunism

RBC Wealth Management believes that cash can play a role in clients’ portfolios by dampening some of the shifts between risk on and risk off, but at the same time stresses the danger of being underinvested: “There are few certainties in investing, but one that comes pretty close is the erosion of wealth that occurs if you are sitting in cash all the time, leave aside taxes and your own spending, simply because of inflation,” said George King, head of portfolio strategy at RBC Wealth Management in the British Isles.

King talked about the art of cautious opportunism: “It is very hard to predict what is going to do relatively well, but there is always a type of investment that is working,” he said. “Overall, our view point is on the positive side. But because the risks are not few, there is a reason for caution. In client terms, you can be wrong in two ways: you can miss something great or you can get caught and really lose out. You can survive doing OK and missing some runs, but you really need to avoid disastrous outcomes.”

King believes, however, that the message about opportunities is equally important. Some of the firm’s tactical themes are emerging markets currencies, high dividend stocks, intermediate corporate credit, fund of hedge funds, resilient equities and emerging market debt.

“In emerging market debt, we have not tried to pick out location by location,” King said. “We have tried to stay diversified, and have conversations around whether clients want to be in hard or local currency debt, or sovereign versus corporate. For that, we have several versions of emerging market debt exposure, and there is also one that blends all of them, which would frankly be the preferred starting point.”

Moreover, King thinks that the break-up between emerging and developed market equities is slightly simplistic: “Many emerging market companies are multinationals run by the same governance principles as in the US,” he said. “On a name by name basis, they can be quite different than on an aggregate basis; we do not have a general preference for one versus the other.”

Alternatives

King also highlighted the importance of looking beyond the classic asset classes of equities and fixed income: “For many clients who take our discretionary investment service, that will usually include weighting into something else than stock and bonds,” he said. “Some examples of that might be a manager that is not trying to track a benchmark but is going to find opportunities wherever they exist, maybe in gold, Japanese equities or inflation-linked bonds. That is not something individual clients should try and do, but individual managers who have a skill set around this can.

“Another example is hedge funds; depending on whether we are talking about our heroes or villains, they can play a role,” King said.

Tracy Maeter, head of investments for the UK and the Channel Islands, said, however, that RBC Wealth Management does not recommend investors with large cash holdings to return to the market overnight: “Normally, you don’t worry about that too much, but we would probably be talking to the clients about doing it in different stages because you will get swings over time,” she said. “Alternatively, you can start with a lower risk profile. Another way of approaching it is to start by implementing the fixed income element of the portfolio.”