Balanced investment in volatile markets
Balanced funds have proved their worth time and again and rewarded investors with positive returns and stability.
In the current economic environment, volatility is a daily reality and investors are encouraged to create a diversified portfolio - through exposure to different asset classes, namely equities, bonds, properties and cash, with some offshore assets - to achieve solid returns on their investments.
There are various asset classes used to reduce the impact of market volatility:
• Domestic listed equity
• Domestic listed property
• Domestic bonds - government and corporate (credit)
• Domestic cash
• Global listed equity
• Global listed property
• Global bonds - government and corporate (credit)
• Global cash
• Derivatives
Back to basics
But before constructing a portfolio, one should revisit the basic principle of investing: earning real returns over the long term, with the ultimate intention of beating inflation. In order to achieve this goal, one would need to have some exposure to growth assets.
Finding the balance
A balanced investment strategy makes sense for investors because, as history shows, asset classes are not all correlated to one another. On the back of this, it is wise to have a mix of assets with negative correlations to diversify risk. When certain assets perform well, others will inevitably do badly, for example, when equities do well, bonds can sometimes perform badly. With a mixture of asset classes across a portfolio, overall risk should be reduced, providing a balanced return.
The value of a balanced investment strategy is most evident during times of market turbulence. It is during such times that the “fear” factor which drives markets downwards kicks in. The ride is much smoother for a diversified investor however.
Beating inflation
Another important goal for investors in addition to diversification is the need for returns that are better than inflation. This makes sense because inflation erodes the buying power of money. It is worth noting that equities and property have consistently beaten inflation over time. Bonds have not always managed to do so, although there are periods when they have performed better than equities. Equally, there are periods when global equities have performed better than local.
Strategy and tactics
Asset allocation views have both a strategic and a tactical component. The strategic component is long term and is based largely on macro-economic forecasts and how the different asset classes will perform under various conditions. The tactical component is shorter term and is based on the realisation that asset prices may dislocate from their fundamentals, allowing opportunities to be exploited.
The key to a successful global balanced solution, therefore, is to combine asset allocation expertise at the portfolio construction level along with stock selection skills at the individual asset class sub-level. The strategy of a balanced fund is similar to that of a shopping mall, with anchor tenants – preferably equities - holding key strategic locations within the mall, and line shops - consisting of differing weightings in property, bonds, and cash and in offshore - positioned around them.
Active management
These funds are thus not passive investments. The portfolio manager has the responsibility to tactically adjust the asset allocation as macro-economic conditions change. This means the portfolio manager has to anticipate changes in business cycles and time the associated adjustments in the portfolio correctly.
Risk and return in balance
A global balanced portfolio solution provides investors with exposure to a number of asset classes, domestic and foreign, that are positively and negatively correlated. This diversification of assets provides investors with the comfort that their exposure to risk is contained without unduly compromising return.
