The traditional 60/40 investment portfolio and the notion that cash is king are two pieces of conventional wisdom challenged this year, though other practices of top investors have weathered the storm, say experts. Christian Gattiker, Head of Research at Julius Baer, says the firm saw a ramp-up in cash in the first half of the year – which is usual in times of crisis – though he notes that this was not necessarily profit-taking but rather “an extensive paralysis in terms of re-investing payouts and paybacks such as dividends or bond redemptions”.
Following the fast recovery of some markets, the notion that cash is king has been the most challenged conventional wisdom this year, says Gattiker.
Overall, the best results in 2020 were made by two groups, says Gattiker. Hard-boiled investors, who are looking at the degrees of panic irrespective of the fundamentals in the short term and are exploiting major contrarian opportunities; and long-term-oriented investors with no pressure to sell, who saw “the panic in the first half of this year as an uncertainty that is part of the investment game, and that the steady hand is rewarded for staying invested in the long run”.
The importance of taking a long-term view is one piece of conventional wisdom that seems to have passed the test in 2020. A long-term approach helps build portfolio resilience by overcoming volatility noise and avoiding impulsive behaviour, says Vipul Kapur, Managing Director, Head of Private Banking at Mashreq. “Although successful market timing may improve portfolio performance, it is difficult to time the market consistently. In addition, market-timing can lead to a significant opportunity loss.”
Portfolio diversification is also still at the heart of successful investment strategies, he says.
“A well-diversified portfolio will generate better risk-adjusted returns and is the best defence in times of economic uncertainty,” he says.
60/40 is obsolete
One piece of conventional wisdom that is losing appeal is the traditional 60/40 portfolio, the mix of equities and bonds that has been a mainstay of investment strategy for decades, says Kapur.
“The 60/40 asset allocation strategy is at risk of becoming obsolete to some investors and is not very well suited for today’s financial market environment. With stocks and government bonds at historically high levels, investors need to seek out alternatives,” he believes. “Investors require a multi-coloured pie that brings more balance by adding more asset classes and alternative investments.”
The 60/40 asset allocation strategy is at risk of becoming obsolete to some investors and is not very well suited for today’s financial market environment. With stocks and government bonds at historically high levels, investors need to seek out alternatives.
One such asset is gold. Typically seen as a safe haven asset, gold proved its worth in 2020, making an impressive comeback as the crisis asset, says Gattiker.
That’s echoed by Kapur, who says gold remains a strategic asset in any portfolio. “Investors have embraced gold as a key portfolio hedging strategy this year, particularly as expectations for a faster recovery from Covid-19 are shifting towards expectations of a slower recovery, as we see additional waves of infections.”
Growth in 2021
Can positive trends in 2020 point the way to further opportunities in 2021? Gattiker says that much of the outcome of the crisis “seems to be rather intensifying and accelerating current trends than creating completely new ones” — particularly in the fields of technology and healthcare, but also retail, real estate, infrastructure and energy.
“Some of them are directly linked to the pandemic such as the boost to biotech/healthcare spending and technology themes such as cloud computing and cybersecurity as the world went completely online at some stage,” he says. “The same for the shift to online retail, where lockdowns introduced many consumers who had been rather sceptical to the space.”
Much of the outcome of the crisis seems to be rather intensifying and accelerating current trends than creating completely new ones. Some of them are directly linked to the pandemic such as the boost to biotech/healthcare spending and technology themes such as cloud computing and cybersecurity as the world went completely online at some stage.
With the world in extended lockdown, and work from home becoming the norm, “new themes started emerging with a focus on artificial intelligence and technology sectors”, says Kapur. “Nasdaq has been on a roll with over 25 per cent up-move in 2020, which shows how smart investors started moving out of old economy sectors to the emerging tech themes.”
Overall though, wealth preservation has been a key focus for clients and will continue to be so as long as the economic outlook remains highly uncertain, says Kapur.
Many clients have increased their positions on investment grade portfolios and corporates with stronger balance sheets while avoiding the high-yield space and high beta investments, he says. “Investors want to wait out the tide before getting back out into the new opportunities.”
Growth to shrink
Growth is expected to shrink across all economies this year, and old economy and commodity-linked sectors will continue to face a rough time, says Kapur.
That means that many investors continue to focus on wealth preservation, with a “pragmatic view of investment return expectations, until progress is made on suitable vaccines and corporate earnings start to stabilise after the impact of the shutdowns,” says Kapur. “Overall focus still is skewed towards wealth preservation.”
Big rise in demand for ESG
While investor interest in environmental, social and governance (ESG) investing has been growing in recent years, interest in ESG has grown exponentially in 2020, according to a survey by Standard Chartered Bank that scoped the view of affluent and high-net-worth investors in the UAE and several other countries.
“The pandemic and its overspill has highlighted a sizable vulnerability in the strategic assessment and planning, not only of the healthcare systems, but also of the global supply chain and financial markets. This has the potential to significantly reshape investor flows and to positively influence the future of ESG investing,” says Naushid Mithani, Head of Global South Asian Community, Europe, Middle East and Africa and Private Bank Head UAE at Standard Chartered Bank.
The pandemic and its overspill has highlighted a sizable vulnerability in the strategic assessment and planning not only of the healthcare systems but also of the global supply chain and financial markets. This has the potential to significantly reshape investor flows and positively influence the future of ESG investing.
Summarising ESG, Mithani says: “Put simply, sustainable investment is investing in businesses, funds, or other financial vehicles that actively seek to generate social and or environmental benefits and financial returns.”
The survey of affluent and high-net-worth individuals – carried out early 2020 – found that 72 per cent of investors in the UAE surveyed were interested in the possibilities presented by sustainable investing, with interest even higher among younger investors. However, this was offset by the apprehension investors in the UAE have towards sustainable investments, which was higher than that of investors in Asia, says Mithani.
Whether ESG investments have trade-offs, such as lower returns or lower liquidity, is a question for some investors. But Mithani says that institutions and individuals should see ESG as an opportunity to mitigate risk, reduce long-term volatility, identify opportunities, and even simply beat the market. “Recent analyses have shown that the performance of the ESG funds analysed was higher than the average performance of conventional funds.”
While ESG is a global phenomenon, Mithani says it has a particular relevance in the UAE and wider region, as economies diversify away from oil and there is greater use of renewable energy. “The collapse in oil prices and subsequent regional economic downturn have served as an awakening to the importance of partaking in sustainable investments,” he says. “With Expo set to take place in Dubai next year, it is providing further awareness of the opportunities available in the UAE, as well as bringing more countries together to further encourage sustainable investments.”