UKJan 13 2017

How to position portfolios to preserve your client’s capital

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How to position portfolios to preserve your client’s capital

Uncertainty persists over the justification for 2016’s positive market returns and valuation pressures continue to mount.

But in 2017 clients don’t want uncertainty – they are scared by the fast changing world and they want answers.

Advisers are increasingly facing clients concerned about inflation eroding the value of the pound in their pockets and want to know how to position portfolios to preserve their capital.

Investment experts FTAdviser spoke to have shared their thoughts on how advisers could make sure their clients are best placed to weather the storm clouds approaching this year.

Jason Hollands, managing director at Tilney Bestinvest, said as we saw during 2016 we are moving into a very different environment of greater divergence in central bank policies.

The Fed is on a rate hiking cycle, with the potential for a rethink on ultra-low rates by the Bank of England (which has just acknowledged it may revise upwards its growth forecasts), and continued accommodative policy in Europe and Japan. 

Mr Hollands said: “I therefore think the right thing for advisers to do is to stick to a robust investment strategy that makes sense for their clients’ longer-term horizons, and not get blown off course by short term bets second guessing news events or the shifting tides of sentiment which have flipped aggressively from fear to hope since November.”

According to Mr Hollands that means advisers should encourage their clients to pursue a diversified multi-asset approach that includes some ballast of defensive assets including cash and more stable absolute returns and not overexpose clients to equities.

He said portfolios should be rebalanced periodically so that clients' asset allocation doesn’t drift into an inappropriate level of risk, and so profits are locked in areas which have enjoyed particularly strong runs. 

Mr Hollands said: “I would suggest advisers are especially mindful of the impact of sharp currency shifts over the last year, in both flattering returns for sterling returns on overseas holdings and that they manage client expectations that this is unlikely to be repeated – indeed there could be a partial reversal in the narrative of a weakening pound from here. 

“I would be wary of eschewing UK assets and focusing heavily on overseas assets when the pound is so weak.”

Notwithstanding the broad valuation headwinds, Dan Kemp, chief investment officer for Morningstar Investment Management EMEA, said there are some compelling valuation opportunities, including a medium to high conviction in emerging markets, European financials and sterling.

He said: “While questions persist as to whether Donald Trump’s election is a game changer in terms of US economic growth, the availability of this news is tempting investors to speculate on the cyclical or structural nature of reflation. 

“This, in turn, risks sending them on a path of short-termism and sector rotation. However, investing is always a long-term endeavour and so this temptation must be resisted.  

“If 2016 contained just one lesson, it is to avoid being whipsawed by changes in short-term sentiment. 

“Investors are likely to face similar challenges in 2017 and therefore must do their best to shut out the siren song of forecasters.”

Investors are likely to face similar challenges in 2017 and therefore must do their best to shut out the siren song of forecasters.Dan Kemp

Looking ahead through a valuation lens, Mr Kemp said there are many more hurdles to jump. 

Markets may go up, markets may go down.Jason Hollands

Bond yields are still largely negative in Germany and Japan (out to a seven-year maturity) and Eurozone sustainability is far from secure. 

Most critically, he said valuation pressures continue to mount in many key markets. 

Mr Kemp said this should create a growing sense of caution among prudent investors, especially those relying on fixed income investments to protect them against a decline in equity prices. 

He said: “The strong returns in many markets through 2016 appear unsustainable in a long-term context as asset prices are subject to the gravity of fundamental valuation.” 

As prices become dislocated from fair value, Mr Kemp said portfolios should inevitably become more focused on the preservation of capital, while thoughtfully allocating assets towards pockets of opportunity that offer compelling valuation advantages and a margin of safety. 

He said these pockets of opportunity include emerging market equities and debt; European financials where much of the downside is priced in; and sterling, which still appears undervalued relative to the US dollar.

In terms of the tax efficiency of investments, Tilney Bestinvest’s Mr Hollands said in this time of great change what there is a little more certainty around are the current reliefs on pensions, Isas, VCTs, EIS, etc. 

Mr Hollands said: “Markets may go up, markets may go down. 

“Thankfully we do know how much tax relief an investor can get on a pension contribution, and this is probably going to outweigh any market movement over the year, so financial planners should remind clients not to forego valuable allowances that can help underwrite any potential market declines.”

Laith Khalaf, senior analyst at Hargreaves Lansdown, said there was no point trying to second guess the outcome of political machinations and their effect on markets. 

He said investors and their advisers should spend their time looking at the factors affecting their portfolio they can control. 

Mr Khalaf said: “That means maintaining a diversified portfolio of good quality funds, reducing charges where possible, and making sure your investments are held as tax-efficiently as possible by maximising the use of tax shelters.”

What all of the experts FTAdviser spoke to agreed on is in this fast changing world, it is important for advisers to make sure clients don’t fixate on the short-term.

Darius McDermott, managing director of Chelsea Financial Services, said: “There are so many unknowns and worries in the world at the moment it is impossible to pre-empt market movements so just concentrate on long term goals.”

emma.hughes@ft.com