Global Balanced Solutions
Our Global Balanced Solutions team manages institutional mandates with the goal to beat the client’s benchmark by applying an active asset allocation and security selection approach.
To earn more income from your investment, tapping into a greater number of potential sources via a diversified mix of asset classes can help. However, this strategy promises success only if the following precepts are adhered to: spread your risk, manage your portfolio dynamically and be consistent.
The stubbornly low interest rates we saw over the past few years were untypical for financial markets. They presented a challenge to a good many investors. Especially those investing in bonds were left facing a dilemma, whose crux was that the skimpy yields they were getting barely sufficed to hit their own financial targets. Indeed, promotional pitches from equity investors basking in the glow of the sustained bull run and scoffing at bonds sounded enticing. Did their fantastic dividend yields suddenly make them oblivious to the fact that equity investments carry greater risk? Lo and behold, February saw a sharp decline, and they were caught off guard. Luckily for them, this correction was short-lived. Still, it served as a sobering reminder that caution was in order. As they revert to normality, markets have been oscillating more wildly of late, reflecting the growing uncertainty of investors. Despite the wake-up call from the short-lived shock coupled with nervous whipsaw patterns, many investors have by no means abandoned their quest for more income.
Investors looking to draw an attractive income from their investment can scarcely afford not to expand their potential income sources. For example, if – alongside bonds – equities are also added to their portfolio, they can earn extra income from dividends in addition to coupons. However, it is important that the portfolio be diversified so as to ensure that the risks associated with all of the additionally included markets do not start dangerously piling up. Diversification means spreading the risk – the more broadly, the better. As illustrated in the chart below, systematically combining select asset classes so that they optimally complement each other can reduce the overall risk to less than the sum of the risks of the individual markets.
For illustrative purposes only. Risk analysis of the multi-asset income strategy over a one-year period, model calculations as of 31.12.2017. Source: Vontobel Asset Management
Each asset class and its categories – as in the example above relating to bonds, global, emerging market and high yield paper – offer a broad spectrum of securities from issuers of all types and quality across various countries and sectors. The goal of portfolio diversification across all of these criteria is to achieve an optimal risk/reward profile, ideally one that is asymmetrical so that returns generated in up markets outstrip losses incurred in down markets.
Conversely, as the number of securities added to the portfolio increases, the more complex it becomes to manage in sync with the markets. Once invested, investors therefore would do well to keep all assumed risks carefully under control as they are subject to change at any time due to unforeseen events. The portfolio should not lie idle but must instead be dynamically readjusted on a continual basis. When dividend yields are generally more attractive than bond yields, total returns from the equity component can be increased by raising the equity allocation in the portfolio – and vice versa when bond yields are more attractive. If markets start fluctuating more widely, attractive premium options can also be written on the stocks in the portfolio depending on the outlook for the share price – as an added source of income alongside coupons and dividends. The long-term success of an investment largely hinges on the active investment decisions.
How to get this just right? The wrong strategy would be to focus entirely on high coupons and dividends alone. It is advisable to adopt a systematic approach and to stick with the strategy in keeping with the defined investment objective, risk limit and investment horizon at all times. To this end, it is best to rely on a clear investment process that focuses primarily on risk control. This will also help to ensure positive results can be reproduced. The first step is always an in-depth analysis, even if it is very time-consuming. Because only then is it possible to make systematic investment decisions in such a way that they hold out the prospect of attractive returns, on the one hand, and ensure that the overall risk remains manageable, on the other. An investment portfolio that mixes an array of asset classes to produce an attractive income stream would do well to focus on securities of high-quality companies that promise not only attractive coupon and dividend payments but also a rock-solid business performance going forward. A broad selection from the global bond and equity universe will enhance the diversification effect noted at the outset. And last but not least, the best way to hit the investment target is to look at it from the standpoint of a creditor who not only wants his money returned after the agreed period but also his reward for lending it.
For those who have neither the time to perform the requisite analyses nor the courage to assemble such a portfolio on their own, investment funds offer a practical solution. They enable this demanding task to be delegated to a specialist team that combines investment knowledge with experience in the various sectors, and also possesses the necessary technical facilities. Unlike mandates reserved for big-ticket investors, neither a minimum investment is required nor is there a fixed term of contract. Investors may opt in or pull out at any time. When pulling out, however, the desired income stream would run dry, which of course is not their aim.