The recent volleys of economic news had made it quite difficult for investors to decide which course of action to take, and what strategy to follow in keeping their investment portfolios intact. With all the gyrations in interest rates, and stocks and bonds in recent months, the question is: Where do investors go from here?
It becomes even more confusing as investors are being inundated with information that might be useful to a portfolio manager, but not to those individuals who are trying to make long-term decisions. Those who can stomach the volatility may want to wait “until the dust settles” to shift around their investments. There are also several ways to cut back on the risk in their investments.
Most of those moves do not have to be radical but, indeed, sensible. We will attempt here to focus on certain forms of investments, address the main issues, and make sensible recommendations. As a start, different investors have different objectives. However, one main and common objective remains paramount to all: Superior performance. To attain that primary goal necessitates an explanation of what drives that performance. It is simply a matter of orientation to individual investors as well as the investments strategists.
The five main criteria used in this process are: Identifying the predominant investment themes; achieving a balance between top-down and bottom-up considerations; respecting market cycles; cultivating a passion for new ideas; and being flexible and open to change.
What we are looking for, in the final analysis, is the Superior Model Portfolio in the existing and expanding universe of investment products.
Selecting individual stocks in a portfolio remains vitally important. With proper research capabilities, a portfolio manager should be in a better position to capture the right industry and ensure a stronger base of stocks. Some managers offer contrary views and they would rather include the worst stock in a strong group, than the best stock in a weak group. That depends on the perceived overall market opportunities, which are realigned with the investment style and preference. For example, growth vs. value, large-cap vs. small-cap etc, but which are the companies to seriously consider investing in?
Companies that are genuinely committed to a restructuring strategy, and have taken demonstrable steps in this direction are poised to reap greater benefits — improved market share, profitability and growth prospects. There are, however, constant pressures on many companies to restructure mainly from shareholders and from local and global competition.
Regardless of the method used by the portfolio managers, their own experience, added to the track record of the managed portfolios, should establish the theme for the superior performance and, in meeting the objectives of their clients.
To meet the ongoing need for stocks with attractive characteristics, managers should continuously maintain in their clients’ portfolios, stock issues highlighted for both risk diversity and liquidity reasons. Moreover, they should be able to modify the portfolio not only to reflect the realism of the existing environment, but also the expanded potential stock universe.
Generally speaking then, the selection of vital stocks in a portfolio is based on broad sources of information including fundamental, technical and quantitative sources. There are certain visible considerations also used when analyzing and choosing the right stock, such as: Fundamental dynamics, earning trend, technical profile, valuation factors, and liquidity. All these factors collectively should enhance the portfolio managers’ insights in going forward, given the volatile nature of the investment sector and the general orientation of their clients.
Stocks react in many different ways. Changes in interest rates could effect the stock market trends as we see these days. Also, stocks that are cyclical in nature fare well as they improve during periods of economic expansion.
On the other hand, bonds in a portfolio are highly sensitive to changes in interest rates. If, for example, interest rates are believed to be going up, managers should respond by shortening the maturities in the bond portfolio.
It is a sensible strategy to slowly start laddering maturities. That means buying bonds with staggered maturities so that each year the portfolio managers will have cash to reinvest.
If clients are investing in money-market funds, they should periodically check their holdings to make sure they are not overly weighted in financial and are poised to take advantage of economic growth. Investors in various types of funds should choose wisely, since not all funds will be insulated from economic fluctuations. Although diversification adds a sense of “calculated” risks, it is not by all means bulletproof.
Going forward, the ability to develop the portfolio from a broadened investments universe should ultimately ensure that the portfolio is effectively positioned to take advantage of top-ranked investment themes and products. That marks the beginning of a Superior Model Portfolio.
(Habib F. Faris is vice president at Clariden Bank, London)
