Adapt your investment approach

Adapt your investment approach

The world is a small place. To astrologers, a mere speck of dust.

The distance from the earth to the sun is roughly 150m kilometres.

Multi-asset investors have traditionally looked at the world from 60,000 feet, from the top down, and have tried to construct portfolios based on that perspective.

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But the danger, to paraphrase Abraham Maslow, is that to a man with a hammer, everything looks like a nail.

The point is that not every problem can be solved in the same way, with the same tools. Different approaches and perspectives are often required.

With aggregate yields so low in absolute and relative terms many multi-asset income funds have been forced to pay lower yields or return capital as income in one form or another.

But to investors who build income portfolios from the bottom up, the world looks very different; the problem is not where to find attractive levelsof yield but which one of the multitude of opportunities to select.

It means moving away from catch-all buckets, like the S&P, to the prospects of individual companies and business drivers that constitute the market.

And then having the discipline to not simply chase high yield for income’s sake, but instead consider the long-term total return and sustainability prospects of each security.

The same applies to risks and how we view them. Every investment decision involves taking a view on prospective risks.

But for anyone seeking to get a handle on risk, there are a fair few challenges.

Who knows what might come from the threats being made between major trading nations, the political standoff in the Gulf or more quantitative easing in the Eurozone?

Again, one option is to hunker-down and focus on what you can control.

That still means looking for the best assets across the globe, and ones with the potential to generate sustainable income that grows faster than inflation.

Furthermore, if the cumulative savings pot can grow to the point where the natural income being generated is enough to satisfy an investor’s needs, there is the advantage of never being forced to sell assets at inopportune times.

Most investors tend to think about the investment cycle in blunt terms, for example where equity markets or bond markets are.

However, it may be better to focus on where individual companies and sectors are in their cycles, then determine which of those can be harnessed most appropriately to calibrate investment outcomes with clients’ needs.

Key Points

  • With yields so low, multi-asset fund managers are having to rethink their strategies
  • Every investment decision involves taking risk
  • It may be better to focus on where companies are in their individual cycles

Consensus forecasts have the earnings growth for the S&P slowing to 12.7 per cent this year, and further slowing to 6 per cent next year.

But many income-generating companies within that market are on a different trajectory, which is only identifiable from the bottom up.

US real estate investment trusts worked through higher supply last year, particularly in the healthcare sector, and funds from operations forecasts (an indication of REIT cash flows) are currently accelerating.