Weathering a financial shock: robust trumps resilience
By Frank Jasper, Chief Investment Officer
03 September, 2018
The theme for this year’s Sorted money week is building financial resilience. Resilience is defined by the ability and speed taken to recover from a shock. This is a laudable goal.
Our job as active investment managers is to go one step beyond resilience. It’s to build portfolios that are robust in periods of market turmoil. If we do this well we can reduce losses, reducing the shock to your finances and hopefully calling for a little less resilience. The ability to recover is important but I would rather lose less in the first place.
As an active investment manager, we have a raft of tools at our disposal to build robust portfolios that help protect your wealth. These include:
- Building robust multi-asset strategies – the building blocks of our multi-asset portfolios like KiwiSaver and the recently launched multi-asset class managed funds are a range of different types of assets, shares, property and fixed interest, based in New Zealand and around the World. This multi-asset approach puts robustness at the front and centre of portfolios. Each asset type, and often assets in different parts of the World, perform differently at different times. Very importantly some investments like fixed income tend to perform well when shares are performing badly. Having fixed income acts as an important protection in times of share market stress.
- Changing asset mix as conditions change – not only does the mix of multi-asset portfolios help protect your investments in but we can change this mix responding to shorter-term market conditions. This can be an important source of extra returns as well as managing risk. At present we are worried about rising interest rates outside of New Zealand. As a consequence, right now, we own a lot less in international fixed income than usual preferring to invest your money at the higher interest rates we expect will be coming. Similarly, we think that inflation in New Zealand will rise and have invested in inflation indexed bonds. These bonds benefit from increases in the consumer price index. These shorter-term portfolio tilts are an important tool in building more robust portfolios.
- “Quality” approach does better in tough markets – the STEEPP investment process that we use for selecting hand-picked portfolios of shares in New Zealand, Australia and international markets emphasises quality, growing companies. Quality companies typically perform better than the average company in challenging markets. The reasons for this make sense. Quality businesses typically have less debt, tend to have profits less tied to the direction of the economy, are growing and have business models that are protected from competition. All of these attributes protect profits and are increasingly valuable in difficult times.
- Using falling prices wisely – falling share prices get a lot of headlines but it is not all bad news. Periods of market stress often enable us to buy shares in high quality, growing companies at very attractive prices. It’s like your favourite restaurant is on special – you should be dining out every night and enjoying the best steak in town. The great news from buying shares rather than steak on special is that it’s even good for your health, in this case, the long-term health of your wallet.
Sorted is right. Building your financial resilience is important. We work hard to do our part by delivering robust portfolios designed to protect your wealth should, as will inevitability happen, we face more difficult market environments.