The managed fund portfolios (referred to as “MFPs”) provide investors with a dynamic asset allocation in order to address the different factors impacting markets at various points over the investing life span of an investor. In simple terms, the basic asset classes for the MFPs are Money Market, Investment Grade, High Yield and Equities. Visualising the range from the safest to riskiest asset class would give us the following:
The degree of risk taking varies according to the different forms of strategies. Naturally, the Conservative strategy has a tilt towards safer assets, the Balanced strategy provides greater symmetrical risk towards asset classes and the Growth strategy tilts towards the riskier band of the asset classes. The selection and type of strategy depends on the ability and willingness of investors to bear risk. This depends on various factors which financial advisors will be able to determine through their professional service.
Shifting the degree of risk taking in adverse market conditions & active management for MFPs
It is no mystery that investors on their own find it difficult to manage their capital in line with market conditions. The reasons stems from the fact that investors have little time to decipher the multitude of factors that pose significant risks to an underlying strategy. In fact, MFP strategies seek to provide an investing solution for investors to meet their long term investment goals. The term ‘long-term’ cannot be over stressed enough in situations of market turmoil and capitulation. The health and market event brought forward by Covid-19 is a classic case of shifting the degree of risk-taking and active management.
Ever since the virus spread across to other regions like Europe, there was a sudden sense by markets that the virus will have a material impact on economies and businesses over the short to medium term. Whilst acknowledging that this may be repetitive, investors need to note the key words in the prior sentence “short to medium term”. This means that long term investors should look into periods of distress as an opportunity to increase their long term value of wealth and definitely not as a threat. There has been countless market disruptions over the past century; in that investors seized the moment to invest for their long term value gain. Admittedly, the emotional toll to invest when markets are going down is a not the most pleasant. But think about it for a moment. Essentially, investors would be getting strong business models with a discount in relation to their long term valuations. On the other hand, when investors are investing when markets are going up, they’d be getting strong business models at an ever more expensive price.
Why does this occur?
In simple terms, there is one common risk factor for all asset classes which features amongst all types of investment vehicles. This is called Market Risk. Market risk increases in times of uncertainty which will negatively impact the value of investments and decreases in times of certainty which will have a positive impact on the value of investments. The comprehension of this factor will put the emotional aspect of investing in check and ensure that investors implement a rational process to an investment.
Across the three strategies for the MFPs, there has been a downward shift in the overall risk taking over the past two months. This meant that less risky assets were preferred over this period when compared to riskier assets. Effectively, we sought to protect against the downside brought forward by Covid-19.
Compared to a passive static asset allocation strategy, the MFPs provided investors with less volatility during this time of market imbalance. Nonetheless, investors that have a long term horizon need to realise that Covid-19 is a temporary factor and the moment that markets realise that this factor will perish, riskier assets will return to be the preferred choice of investing for market participants. Ultimately, the risk-reward aspect for investors will always hold in the long run. This means that investors need to shift their attention to their long term goals in periods of market distress but also in periods of market success. The short term action by investors can fundamentally impact their long term financial goals, hence investors should always seek professional advice and opt for rationality over emotions.
This article was issued by Jesmar Halliday, CFA. Investment Manager at Calamatta Cuschieri. For more information visit, www.cc.com.mt . The information, view and opinions provided in this article are being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice.