Avoid knee jerk reactions to address poorly positioned portfolios and be wary of equities funds peddling the ‘buy the dip’ narrative, a prominent chief investment officer within a wealth firm has warned advisers.
The best action advisers can take with client portfolios that may have not have been ideally positioned going into the volatile and plummeting markets triggered by the global pandemic coronavirus is to conduct a thorough check of the portfolio holdings to identify exposure to high yield, leveraged loans and low quality corporate debt, Isaac Poole, Oreana Financial Services CIO and former Willis Towers Watson head of capital markets research in the Asia-Pacific region, said.
“Spreads have blown out but my view has been that these are typically not appropriate for retail investors anyway, and there is a real risk of gating, illiquidity or outright loss of capital in some of these positions,” Poole told Professional Planner on Wednesday.
“Other than that, we will soon get to a point where international equities look somewhat attractive. This comes with caveat that given where the AUD [Australian dollar] forward curve is now, it would need to be fully hedged exposures,” Poole said.
Markets have sold off across the board in the last month as governments around the globe have enforced shutdowns and mandated social separation as the global pandemic has escalated. The ASX/S&P 200, MSCI Europe, S&P/ASX Small Ordinary indices have all dropped in the 25 to 26 per cent range for the month to March 21, Morningstar numbers show. MSCI AC Asia ex-Japan and MSCI emerging markets indices have held up better than their European and Australian counterparts with 9.6 per cent and 14.8 per cent drops respectively.
Poole said he believed many retail investors had “far too much equities exposure” leading into this financial markets dislocation relative to their risk-return objectives, which means many advisers were not prepared for the selloff.
“The mantra of being long-term investors… might feel clever during a decade long bull market but it breeds complacency and will be hurting now,” Poole said.
Further, Poole questioned to role equity funds managers have played and continue to play by targeting advisers saying this will be a ‘V-shaped recovery’ and to ‘buy the dip’.
“First, I worry that these fund managers are blurring the line between fiduciary duty on one hand and the need to retain FUM and keep fee revenues going through this period on the other hand,” Poole said.
“Second, retail investors typically have fewer levers than institutional clients to protect and manage their portfolios. Trying to time this by buying the dip will have been both painful emotionally and costly financially,” he warned.
While the driver of this recession environment following the current sell off may not have been predictable, Poole noted the economic backdrop provided enough opportunity for advisers and retail investors to prepare and build resilient portfolios through 2019 at equity valuations that were very stretched away from underlying fundamentals.
“From an investment perspective, my sense has so far been that many advisers were not prepared,” he said.