MAY 2012
OPTIONS FOR GROWTH 17 Reduce risk with balanced strategy
Holding a mix of assets is a good strategy in a rocky market, although building a portfolio will depend on the investor’s attitude to risk and their horizon time. Funds with a range of commodities, bonds and equities will appeal to the cautious.
HARRIET MEYER Freelance consumer finance journalist
engaged in, and excited about, mobile devices that are impacting everyday lives. Technology plays a big role for billions of people around the world, and some of the biggest and best-known brand names, such as Apple and Sony, are now regarded as necessities rather than luxuries.
Investors and managers seeking strate- gies for growth face a struggle in these volatile market conditions. Is it wise to opt for riskier sectors with the potential for super-charged returns, or the secu- rity of preserving capital and avoiding extreme swings in performance? Over the past decade, investors will- ing to take some risk in pursuit of profit have earned chunky returns from emerging economies, fuelled by cheap exports, huge, youthful populations and growing demand for goods from their rapidly expanding middle classes. This has produced an array of com- panies with the potential for rapidly growing earnings, despite the low growth in the developed world. But can this continue?
While emerging markets have been beset by their own problems since the financial crisis began, and disproved the “decoupling” theory, they continue to represent an attractive growth opportunity, says Darius McDermott, managing director of Chelsea Financial Services. He says: “Emerging markets shouldn’t be considered an ‘old’ strat- egy for growth when really they have only been considered a viable invest- ment area for retail investors for just over a decade. I’d still back this asset class for growth – particularly com- pared to developed markets at present.” Brazil and Russia, both rich in nat- ural resources, have reaped the bene- fits of booming price of commodities such as oil, gas and metals. Investors have more than doubled their money over the past decade with the IMA Global Emerging Markets index returning an impressive 221%, accord- ing to FE Analytics data.
Stocks that are considered multina- tional have the potential to tap growth in these markets even if their home economy is struggling so investors who want to take less risk, but still benefit from growth in emerging markets, could opt for big, international, blue- chip stocks based in the West. Another sector back in favour after burning investors in the past is tech- nology, as people are once again
With some, such as Apple, now pay- ing a dividend, this sector is tipped to do well over the next four to five years. Over the past decade the IMA Technol- ogy & Telecoms sector has returned 56% to investors, according to FE Ana- lytics data. While a decade ago many technology stocks were risky start-ups, today the sector includes global giants. But there remain risks inherent in the sector. Nokia, for example, was one of the biggest players in the mobile handset market but its failure to capi- talise quickly on the touch-screen tech- nology that drives the smartphone market led to a significant decline in its sales, profits and share price. A mix of assets is likely to work best in a rocky market, although any approach to a portfolio depends on the investor’s attitude to risk and their investment time horizon.
One of the best strategies for growth in recent markets has been simply not to lose money when markets are weak. Investors have to achieve a return of 100% to make up for a 50% drawdown in one year.
For those wanting to avoid extreme swings in performance, the multi-asset style of investing is an option, as volatility is expected to remain high for the foreseeable future while eurozone economies suffer the effects of their debt. The multi-asset style is attractive, as these funds include a range of equi- ties, bonds and commodities. It is use- ful when the prognosis for markets is mixed as long as the balance is right, and the cautious style appeals. McDermott says: “Multi-asset has become increasingly popular over recent years as volatility has taken its toll on investors and they seek more diversification in their portfolios to preserve their capital at the expense of more potential growth from equity investments alone.
“They are great vehicles for investors with smaller pots of money in particular, but there is such a variety that you really need to look carefully at what the fund is investing in. But to my mind it needs to invest in at least five
LOW-YIELD VS HIGH-YIELD PERFORMANCE
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Excess Line Chart From 15/05/2009 To 15/05/2012 Source: Morningstar
different asset classes to be viable.” Simple approaches for growth invest- ing are available, so avoid over-compli- cating a portfolio, adds Ben Yearsley, investment manager at Hargreaves Lansdown. Sometimes simply buying good-quality companies that make prof- its and pay dividends is the best way to achieve long-term growth.
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Multi-asset has become increasingly popular over recent years as volatility has taken its toll on
investors
Capita Registrars’ latest Dividend Monitor showed a 25% jump in UK div- idends year on year, with firms paying a record £18.8 billion. Although the fig- ures were boosted by special payouts from Vodafone and Cairn Energy, underlying growth was 6.6% higher than a year ago, ahead of GDP growth and inflation. So there are plenty of opportunities for investors seeking growth from dividend reinvestment. Yearsley says: “In many markets a more value-based approach seems to pay off over the long term. All you need do is look at Barclays Equity Gilt Study to see the power of reinvested divi- dends. Certainly in the UK this seems correct, as the equity-income sector has some excellent managers who have out- performed over the very long term. “This makes sense. The point of equity ownership is ultimately to receive a slice of the annual profits by way of dividends. Therefore if you can find companies that can grow organi- cally over time, with good cash flow characteristics, then the share price performance should follow suit.” Focusing on identifying and exploit- ing attractive investment opportunities with large, lowly valued, well-financed businesses across the world is a bal- anced strategy for growth. In current markets, any significant drawdown can derail a growth strategy quickly.
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