High risk portfolio strategy

It is no surprise to see investors favour equities for their high-risk clients but are they brave enough to invest in the most volatile emerging markets?

High risk portfolio strategy


During Q1 2014, equity continued to dominate high-risk allocations, although there have been some shifts in terms of investors’ geographic and sector preferences.

Cult of equity

The situation in global equity markets has unsurprisingly not dampened high-risk investors’ hunger for equity as most major indices have had a positive or neutral start to 2014 and economic growth projections around the world are on the up.

The FTSE 100 saw considerable volatility during the quarter, however, and finished at around 6,600 points having started at 6,800. The Dow Jones Industrial told a similar story, experiencing some spikes and sell offs but ultimately finishing the quarter close where it started, at 16,500.

Against this background, in high risk portfolios on average just shy of three-quarters of assets were equities, according to TMPI figures. Fixed income has stayed at around the 10% mark, while alternatives and cash both hovered at just under 6% of portfolios on average, with cash at 3.8%.

This all suggests high-risk investors’ confidence in equities developed throughout 2013 and has persisted into 2014.

“Clients are certainly taking on more risk compared with a year ago, and it has been a continuing trend during the past quarter,” says Craig Allen, head of discretionary investment at Credit Suisse.

“The cult of equity has certainly returned, and we are getting close to the point of equity-only mandates in the high-risk space.”

Allen said the job for managers now is more about advising clients not to take too much risk on rather than offering them options for putting more risk on.

Europe on the upside

While the overall level of high-risk money in equity has not changed much from quarter to quarter, within what is a very broad asset class there are some notable trends as investors seek to capture upside in what many see as a recovering mainland Europe.

“Investors have still been getting out of emerging market equities and a lot of that money is going into European equities,” says Allen.

“We have now seen the end of the ‘taper tantrum’, and high-risk investors have continued the push for equity in their asset allocations,” says Justin Urquhart Stewart, director at Seven Investment Management.

“Investors have still been getting out of emerging markets stocks but our view is that now people should be getting in and raising allocations,” he adds. In what there is of fixed income allocation,

Allen says high-risk investors have been targeting the peripheral European sovereigns again on European recovery hopes. High-yield corporates continue to make up much of the rest. He also notes that clients are showing an increased wariness of longer-dated paper, however.

One development Allen has seen with high-risk clients outside the equity and fixed income spaces is some interest in commercial property.

This has continued throughout the past quarter.

Value range

Another trend seen in the high-risk space is a shift from investors wanting predominantly growth stocks in their equity allocations to more consideration of value stocks, which have often been overlooked until recently, according to Joe McLoughlin, co-head of private clients at GAM.

The types of growth stocks being targeted include technology sector names and also continental European corporates in a more general way, says McLoughlin. In terms of the value stocks being shunned, he feels it’s a pretty even spread across sector and geographies with no standouts.

High risk: investment horizon of >10yrs; vol of >10%; drawdowns of >20%



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