A low interest rate environment and continued accommodative monetary policies by most developed markets in the form of Quantitative Easing have led to stretched asset valuations. As QE depressed yields on safe assets, investors are forced to take on more risk in order to generate targeted returns.
“Looking into 2017 and beyond, investors should continue to seek asset classes with sensible valuations and there is a need to move away from having fixed asset allocation towards a more flexible approach,” says Chris Durack, Hong Kong CEO at Schroders. “A fixed asset allocation approach is not efficient because it does not really take into account all of the available information that you have.”
Conditional Strategic Asset Allocation
“We encourage investors to consider a Conditional Strategic Asset allocation approach, under which the valuation of assets is the key factor determining their inclusion in a portfolio,” adds Durack.
Conditional asset allocation strategy gives managers the flexibility to invest where they see value, without them being restricted by a rigidly fixed asset allocation framework, such as always holding 60 percent in equities and 40 percent in bonds, he explains.
Durack says that investors with longer term horizons might be able to ride out short term risks. However, investors with shorter term time frames could not afford the same risk level.
“Investors needed to be reminded of their investment objective and they should examine their portfolio valuation in different parts of the cycle,” advised Durack. “Our research suggests that valuations remain a critical determinant of investment portfolio performance.”
Responding to ESG implications
On investment trends, Schroders has seen a greater recognition of ESG, or responsible investing, amongst investors, both in the institutional space and in the retail space.
Schroders’ 2016 Global Investor Study found that investors would stay invested for 2.2 years longer in a positive ESG investment product.
The research also found that around a third of investors would definitely move their investment if they discovered it was invested in a company that was associated with dealing arms (35 percent). Over half would consider doing the same for companies that negatively contribute to climate change (60 percent), have a poor record of social responsibility (57 percent) or were in the news for the wrong reasons (56 percent).
“Overtime, this sentiment will likely impact beyond individual investors’ own investments but flow through to expectations on the retirement schemes and products into which they invest,” says Durack.
Environmental pressures are more acute and social pressures are evolving. As the world undergoes rapid change, there is a widening gap in performance between those companies that can adapt and thrive and those that cannot. The typical company in Fortune’s list of the largest US companies can expect to stay on that list for 10 years, roughly half the level of the 1990s, he adds.
“Our clients realise this and are asking how we are responding as fund managers. Schroders has been integrating ESG considerations into our investment processes for almost 20 years,” he adds.
“We are convinced that taking account of world-changing trends, such as climate change, does not have to mean compromising returns. It is important to note that companies that address ESG risks are observed as often doing so in shareholders’ interests,” he concludes.
Schroder Investment Management (Hong Kong) Limited
Level 33, Two Pacific Place,
88 Queensway, Hong Kong