Rather curiously, some ‘global’ equity indices like the MSCI World Index cover only the developed markets. Before investing internationally, investors should look in depth at the markets their products cover, to ensure their exposure is sufficiently diverse. And if possible, they should focus on the economic weight of a country rather than its geographical size.
Emerging markets often only make up a small percentage of equity portfolios, but we think this can be a mistake. After all, a quarter of global equity revenues comes from emerging markets and portfolios need to reflect that in the long term, or risk missing out on the main engines of growth around the world.
Likewise, it’s also important to make sure that the USA – which makes up a quarter of the global economy – does not dominate portfolios. For the last few years advisers will have seen US equities soar to ever higher levels, which may have led them to increase clients’ exposure for fear of missing out on returns. But having a clear, diversified allocation framework helps avoid becoming too fixated or dependent on one market, just in case it begins to disappoint. Not even the mighty S&P 500 can outperform forever.
One area that is looking very interesting is corporate bonds, which have taken a hammering recently. The bonds of high quality companies are being sold as if they’re heading for bankruptcy, while lower-quality company bonds are being priced as if the bailiffs are knocking on the door.
Our portfolios have strategic allocations to corporate bonds, with globally-diversified holdings in both investment grade and high yield debt. We’ve been steadily building our exposure in both areas.
Another part of being diversified is to identify long-running themes. This is as true today as before the crisis, with a focus on real growth stories (and an avoidance of fading industries and trends) contributing to long-term returns.
An example of this is healthcare, which provides lots of interesting opportunities for investors. In 30 years’ time, two billion people across the world will be aged 65 and up – and many of them will be spending large amounts on healthcare. Likewise, the middle classes in developing countries will be demanding the best healthcare in the world.
We believe that the global demand for healthcare will rise steadily as people become older and richer. Company prices may plunge at times, e.g. due to the vicissitudes of US politics, but we regard such selloffs as buying opportunities.
For advisers, ensuring clients have exposure to such longterm trends is vital as a means of generating returns.
Ultimately, there is no ‘perfect’ diversified portfolio. We cannot predict what will happen tomorrow, but we can take steps to ensure that portfolios are exposed to various economic drivers and are prepared for a range of outcomes. The role of the investment manager is to stay calm in the face of market setbacks and avoid emotional responses wherever possible, and diversification plays a key part in achieving this.
Terence Moll
Head of Investment Strategy at 7IM
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