A portfolio review is an extremely valuable exercise and should help you avoid making short-term decisions based on reactions to market turbulence, whilst helping to establish a regular, disciplined, and systematic approach to portfolio rebalancing.
R-E-V-I-E-W your investment portfolio for 2016
Revisit objectives: What are your capital and income requirements? Have you recently had any major changes in your life? Is your risk appetite still the same?
Evaluate your portfolio: Look at the overall positioning of the portfolio. Look at all your assets and liabilities. Compare this to your Asset Allocation. Is your portfolio correctly allocated?
Value: Which asset class will be of value in 2016? From a bottom-up perspective, we are recommending a focussed list of High Conviction Themes and solutions which we believe represent the optimal means of expressing these views. Ask your Investment Counsellor for more information.
Identify portfolio changes: Your Investment Counsellor can work with you to combine steps R, E and V to see if investments are positioned correctly. Do you need to sell or switch into some other holdings? Are there any notable gaps in your portfolio?
Explanation of our outlook for the year ahead: Your Relationship Manager and Investment Counsellor can explain our 2016 outlook on markets and what this will mean for you.
Work with your Investment Counsellor to identify new opportunities: Bring all of the above together to R-E-V-I-E-W your investment portfolio. Why not contact a member of your investment team to discuss your portfolio and the opportunities for the year ahead?
Our Top Tips for 2016 include:
- Considering new asset classes
A new year can be a great time for investors to consider adding new asset classes to their investment portfolios. Equities and bonds very often form the core of investors’ portfolios, but if you’ve never considered adding Structured Investments and Hedge Funds, they can bring about both return and diversification benefits that will be key to what we expect will come from markets in 2016.
- Structuring for success
Structured Investments can be linked to a range of asset classes such as equities, bonds, foreign exchange, and commodities and can be tailored with the aim of achieving a range of outcomes. These include protecting your capital, achieving an enhanced yield, and seeking capital growth. They can serve to both dampen down the overall volatility of a portfolio and offer a way of taking advantage of market volatility.
- Think Alternatives
It might be worth thinking about adding Hedge Funds to your portfolio, especially if you haven’t invested in this asset class before. You can have a conversation with your Investment Counsellor who will be able to suggest an allocation in line with your personal objective.
Hedge Funds can reduce volatility and provide diversification benefits to a portfolio, as well as provide returns less correlated with underlying markets. The reasons for considering adding Hedge Funds to an investment portfolio, especially seven years into a “bull market”, are compelling. With prevailing market conditions such as divergent economic growth, dispersion within equity markets, and high levels of corporate activity, we would expect macro, equity long/short, and event-driven funds respectively to be able to take advantage.
- Optimising your required level of income
The beginning of the year is also a time to review your income requirements. Have you been spending more or less than anticipated? Either way, your portfolio and the composition of your investments can be structured in order to optimise the income taken from it - not to mention ensuring your capital gains allowance is used each year rather than lost. Your Investment Counsellor and Financial Planner are working together on your behalf to make sure you are getting what you need from your portfolio. Let us know if there are any changes we need to discuss - we're at your disposal.
- Looking at your currency exposure – not just the underlying investments
2015 saw a weakening of GBP. This year, there are a number of events on the horizon, many of which are expected to have an impact on currency markets. These include the UK’s referendum on its membership of the European Union (also known as ‘Brexit’), which is expected to have an effect on the Pound in both the run-up to the vote and afterwards. HSBC’s base case is that the UK will remain in the EU, but this will see the currency initially weaken against the Dollar before strengthening into year-end. The upward rise of US interest rates has begun and is expected to climb at a gentle pace over the course of the year. The European Central Bank (ECB) has indicated that it will continue its policy of accommodative monetary policy, which should put pressure on the Euro.
These events, in addition to the divergent paths that central banks are following, are expected to cause ripples in currency markets. This makes it more important than ever to consider the effects of currency exposure in your portfolio.
Foreign Exchange is a specialist area and we would suggest that clients engage with their Investment Counsellor directly to ensure that their currency exposure is managed in the optimal way over the course of 2016 and beyond.
Key messages for 2016 and beyond
Time not Timing: When markets are fast moving, particularly if they are falling, we feel a loss of control over our investments and a greater tendency to take action at any cost. This can result in tinkering with investments and basing decisions purely on a set of short-term factors. It can see investors looking to ‘time the market’ – making buy or sell decisions by attempting to predict future price movements. However, it is notoriously difficult to time the market; rather we would encourage investors to get invested and stay invested, remembering that ‘time not timing’ is the better strategy for investment success.
FTSE 100 returns and the impact of missing the best days
Source: Datastream as of 31/12/2015
Trust in the investment process: The temptation to over-trade can have a detrimental effect on investment returns. Stock picking and phasing investments into the market are best left to investment professionals. It can sometimes be better to do less and trust in your investment process, retaining belief and confidence that your portfolio has been constructed to weather bouts of short-term market turbulence.
Diversification: We would strongly advocate that a well-diversified portfolio avoids over-concentration of risk in any one particular area. It delivers the best results for investors over the longer term for the amount of risk taken.
Source: Datastream as of 31/12/2015
World Equities: MSCI World TR GBP; Fixed Income: 50 per cent Citigroup WGBI UK All Mats TR / 50 per cent Citigroup WBIG All Mats; Cash: JPM UK Cash 3m TR
Moderate Allocation: 3.0 per cent: JPM UK Cash 3m; 20.0 per cent: Citigroup WGBI UK All Mats; 11.9 per cent: Citigroup WBIG All Mats; 2.1 per cent: Barclays Global HY; 1.1 per cent: JPM EMBI Global Composite TR; 35.0 per cent: MSCI World TR; 5.0 per cent: FTSE EPRA/Nareit Developed; 4.0 per cent: Cambridge Associates Private Equity; 14.0 per cent: HFRI Weighted HF TR; 4.0 per cent: CRB Continuous Commodity
Put cash to work: Investors can sometimes leave cash sitting on the side lines, rather than putting it to work. Adopting a disciplined and systematic approach to investing, driven by a robust investment philosophy and process, can see cash being utilised for your benefit, over the longer term.
In summary, we strongly recommend that you undertake a comprehensive portfolio review, both in the context of current market conditions and to ensure that your investments are correctly positioned to achieve your financial ambitions.
There’s still time to achieve one new year’s resolution for 2016. Why not contact your Investment Counsellor today to arrange a review of your investment portfolio?