James Cheo, investment strategist at Bank of Singapore, believes markets could be more volatile this month.
"Our asset allocation now has a slight defensive tilt, but it’s not something investors should be overly worried about. In terms of tactical asset allocation, we are cautious but not bearish in any way.”
With equity markets, especially in Asia, having had a bull run this year, sentiment among clients is very good, reports Cheo. “But we are sending out a message to clients to de-risk, to diversify and de-lever.”
The bank is advocating a rotation strategy to reduce beta risk. This means taking profits on overvalued sectors like technology, and rotating into undervalued laggards such as healthcare. It also recommends taking profit on industrial equities, as the economic cycle looks to be moderating, and increasing exposure to energy equities, which have been the worst performer year-to-date.
The bank’s balanced portfolio has a slight overweight in cash and high yield in both developed and emerging markets. It is underweight equities, expressed through Asian equities.
A typical client adopting a core/satellite approach should now be trimming their satellite holdings. “In a bull market, people would have invested in areas like technology, which has done extremely well,” Cheo said. “We are just urging customers to look at those exposures and reduce the portfolio beta, in case we get some pull-backs or volatility, so we can ride through this uncertain period.
“It’s not a message that we think there’s going to be a big sell-off, but really valuations are at an all-time high. If you project returns one or two years down the road, it’s very unlikely that this trajectory will continue.”
Alts exposure up
The bank has shifted its discretionary model portfolio more into alternatives, increasing the hedge fund allocation to 14% this month from 10%. Cheo said that with traditional assets now fully valued in many cases, “you really have to look at hedge funds and non-traditional assets that can long and short the market. In that sense, there is a place for alternative assets in client portfolios.”
Smart-beta also has a place, said Cheo said, “We are encouraging investors to utilise these products, especially on risk factor investing. You have to diversify correctly and what risk factor investing does is to find the true drivers of asset returns.”