By Stuart Paul, chief investment officer at First State Investments Market uncertainty affects d...
By Stuart Paul, chief investment officer at First State Investments
Market uncertainty affects different investors in different ways. Private investors, for example, often allocate their investments based on expected short-term returns, and in some cases will not invest at all.
IMA statistics reflect this at present with overall funds flow decreasing and private investors shifting from equities into perceived less volatile asset classes, such as bonds. While volatility can be distressing, switching money from equities into bonds is not necessarily the best move.
A more diversified approach can offer more peace of mind and longer-term benefits. Recent trends indicate that investors are not sure of the best strategy for their investments and IMA statistics indicate that there have been increased redemptions and decreased retail sales. At the end of September total retail sales fell to £97.3m from £557.5m at the end of August.
Some investors are holding off investing as they wait until they see periods of sustained growth. No one can pick market turns consistently however and there is the risk of not being invested in the market at all. Others seek safety in bonds with £250m of net new monies flowing into corporate bond and gilt funds in the UK in August.
Bonds are considered safer. They have also yielded better returns than equities over the last year. But not all bonds are safe.
Higher yielding bonds, for example, offer extra yield because they're more risky and relatively more likely to default. Investors switching from equities into this sector are virtually jumping out of the frying pan and into the fire. Quality investment grade securities and selective investments in high quality sub-investment grade corporate bonds, offer steadier, more secure returns. Quality is crucial when investing, regardless of the security type. There is also the risk that investors are selling all or most of their equity investments, to invest in bonds. In these cases there is the risk of being under-diversified.
Investors, who were invested only in equities over the past few years, are a good example of this. Having chased the returns inspired by the tech boom of the mid to late 1990s, they are likely to have suffered from being insufficiently diversified. Capriciously switching asset classes to chase the best returns is therefore not an effective long-term strategy.
Combining the growth potential of equities with the stability of fixed interest can be a better approach. Diversity softens the impact of market volatility. But to achieve consistent long-term returns, an emphasis on quality needs to be inherent within such a diversified approach.
We search for quality assets, whether in equities or bonds. When coupled with the benefits of diversification, we believe quality assets are more robust, particularly in uncertain or adverse markets conditions, a feature of today's market.
It is important to see this volatility as an opportunity. Volatility often leads to quality assets being over sold by the market. Across both equities and bonds we apply bottom-up stock selection and disciplined risk controls to help exploit these opportunities. And in such uncertain times disciplined management of a diversified portfolio of quality securities is the best way for investors to weather the storm.
Investors are seeking safety in bonds.
Bonds have yielded good returns recently.
Combining bonds and equities is best bet.
Investors are holding off investing.
Equities currently experiencing a sell off.
Market conditions remain uncertain.
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