New research shows wealthy have adjusted risk/return objectives
Reyneke van Wyk, Head of the Investment Division in South Africa at Stonehage Fleming
According to latest research from international family office Stonehage Fleming, just over a third of its client families plan to or have already reduced risk in their investment portfolios as a result of COVID-19.
In South Africa specifically, Head of the Investment Division Reyneke van Wyk says that a number of clients have already made portfolio adjustments of between 5 and 15% since March 2020.
The reasons behind the change? According to van Wyk, it’s to do with investors’ current situations. “These adjustments are typically not linked to inappropriate risk levels,” he says, “but rather due to changed circumstances brought on by the pandemic - be it capital requirements or time horizon - which have required some investors to adjust their overall risk/return objectives.”
Increased short-term capital requirements
Given the unique economic challenges faced by businesses this year and further outlook uncertainty, a portion of clients may need to access more capital from their portfolio in the short-to-medium term. If this capital remains invested in higher volatility risk assets and is required at a time when values are down, the investor may realise a loss when accessing it. “It makes more financial sense to move a percentage of higher risk assets to lower risk liquid assets, so they can be easily accessed at short notice.”
Experiencing a large market correction for the first time
A second and exceptional reason for clients making portfolio adjustments is a reaction to the significant market correction that occurred earlier this year. Van Wyk says that the group of clients most affected by the correction are those who sold their businesses around five years ago and are still relatively new to investment management. Similarly affected are successful entrepreneur clients who feel uncomfortable with their own lack of control over their assets and perhaps struggle to trust and rely on an external team to manage their investments.
“Of these groups, a small number feel that their mandate was perhaps not appropriate for their risk profile,” continues van Wyk. “Having lived through the market correction, they now realise that their actual risk appetite is lower than originally thought and have requested to reduce risk accordingly.”
How to reduce risk without the negative ripple effect
For investors whose short-to-medium term business outlook is uncertain, van Wyk believes it is prudent to reduce portfolio risk to ensure that profit and loss remains manageable. In this instance, an investment manager should first obtain a full understanding of how the client’s circumstances have changed or may change in future. Factoring in the financial situation, objectives, time horizon as well as the probability of such changes occurring, will provide further insight as to how much capital may be required, so that a portfolio can be adjusted accordingly.
“While you want to limit capital losses by moving from high to lower risk assets, depending on the market and unique client circumstances, it is advisable not to move capital all in one go,” he warns. “Due to extreme market volatility, it may be more beneficial to make adjustments over a period of a few weeks or months in order to get to a new longer-term target, leveraging off market level changes.”
“At Stonehage Fleming, we always recommend that investors remain focused on their long-term investment strategy and discourage clients from trying to time the market,” concludes van Wyk.
