There are many types of investing
- which does UBS think will become more important and why? byMarc Nightingale, Senior Client Advisor, and
Michael Hilge, Head of Investment Platforms and Solutions, UBS Wealth Management in Jersey.
In an environment where global stocks are enjoying their longest bull run in recent history and the length of the economic expansion enters uncharted territory, we believe investors need to position portfolios for long-term growth while managing risks carefully. At the time of writing, risks include an economic slowdown in China, an accelerated cycle of US Federal Reserve rate hikes and escalating trade tensions leading to a global trade war.
We believe investors should be asking themselves five key questions in respect of their portfolios and consider vulnerabilities that may be exposed in various risk scenarios:
Are you relying too much on market performance? Is your yield worth the risk? Is your portfolio too familiar? Have you considered protecting your profits? Are you prepared to look beyond the current noise in the markets?
To address these questions, investors may consider a "core- satellite" investment approach which combines a managed core portfolio along with more selectively managed satellite investments.
Core Allocation We recommend managing investments with different financial goals as a single integrated portfolio, one that is based on a well- developed plan that accounts for an investor's financial objectives. In many cases, the result will be a core discretionary portfolio that in itself is fully aligned to an investor's long-term goals. It should be well diversified across many different asset classes - ranging from bonds to equities, to non-traditional asset classes such as hedge funds with a proven long-term track record. We believe that the core portfolio should comprise the majority of an individual's financial assets, accounting for 70-80% of an individual's investable wealth.
Satellite Allocation This approach enables investors to combine long-term financial goals with their desire for flexibility and individuality in their
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investment style. However, we caution against holding too many assets in a satellite portfolio so as not to change an investor's overall risk profile and endanger the overarching long-term financial goals. Thus, the overall allocation to satellite investments should comprise only a minor part of an individual's investable wealth, approximately 20-30% and each satellite investment should be further broken down to reduce risk associated with such investments.
We suggest adding satellite investments on an opportunistic basis to complement a core portfolio allocation in order to:
• Profit from short-term market opportunities (6-12 months) – for example, the temporary mispricing of a financial asset due to irrational investor sentiment;
• Profit from longer term, multi-year trends that investors believe are inadequately reflected in the core discretionary portfolio – for example, those that should benefit from secular trends such as population growth, aging population and urbanisation. The philosophy is to invest in attractively valued companies that are solution providers for the challenges of tomorrow;
• Reflect personal preferences for certain investments that are not adequately reflected in the core discretionary portfolio – for example a preference for socially responsible investments which has a positive impact on society/the environment, or private markets where you can improve the long-term risk- adjusted return by capturing additional sources of return including illiquidity premiums, alternative investment premiums and management skill;
• Prepare for and profit from higher volatility by including structured notes – for example capital protected notes that aim to provide positive performance in both rising and falling financial markets.
In summary, by allocating investable wealth on a core-satellite approach, it will not only help address the five key questions, but could increase the prospects of achieving a better risk-adjusted return over the latter part of this current investment cycle.
UBS AG, Jersey Branch is authorised and regulated by the Jersey Financial Services Commission for the conduct of banking, funds and investment business.
www.ubs.com/jersey
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