Interesting times? The industry’s favourite euphemism of the past six weeks needs to be retired. For investment professionals, this should be an unabashedly exciting time, the moment when their decisions and actions on behalf of clients will have the greatest impact.
Sticking to the old strategic asset allocation might not be good enough in a world that seems set for profound change. That is, however, one of a number of potential strategies that MICHAEL BAILEY, GREG BRIGHT, SIMON MUMME and STEPHEN SHORE discuss with investment decision-makers over the following pages.
Some of the strategies that follow can be used in combination, others hearken back to a less complex time and could be used in splendid isolation, many will think that some should not be used at all. They are hardly meant as a coherent plan.
Yet at a time where most CIOs seem to be standing still – one complained to us that there was “too much dust in the air” – these debates might just inspire the first steps toward recovery of clients’ money.
1. Take a deep breath and BUY EQUITIES .Rebalance to your strategic allocation and have faith that the recovery will happen eventually.
Not for the first time, the most memorable reaction to this proposal came from John Coombe, executive director at JANA Investment Advisors. “Buy, buy, buy. How many times can you write buy?” he asks Investment & Technology when we speak. “It doesn’t matter which markets anymore, or whether you back one particular style, because all managers are seeing great value.” Coombe says the decision to dive into equities will obviously depend on your outlook for earnings and economic growth; “but even if you’re pessimistic, it’s still good long-term buying”.
For the JANA veteran, the tipping point was during the first two weeks of October. “[Equities] were reasonable value before then, but now they’re cheap.” However Tim Unger, senior investment consultant at Watson Wyatt, cautions against plunging back into equities simply because risk premia have widened and valuations appear cheap. Unger says he is wrestling with what advice to give to institutional clients due for a portfolio rebalance.
“We have not recommended that clients who periodically rebalance their portfolios should now stop, but I think what were once considered reasonable levels of earnings in the finance and banking sector are unlikely to be repeated. “Rebalancing is a legitimate investment technique, but it is based on a set of expectations, and if there has been a regime shift, if the game has changed, the assumptions that underlie rebalancing may no longer apply. Perhaps now is not the best time to top up equities.”