Investing in a sea of uncertainty

26 July 2016

Tony Simmons , Consultant, Private Wealth |

I have lived through and provided client advice through yet another year of investment volatility.

Recently in a fund manager webinar the presenter mentioned the term “Investing in a Sea of Uncertainty” many times. Later I turned to Google to find some well- known or often used quotes on that same subject. Either there weren’t actually any such quotes or I was inhibited from finding them due to my Baby Boomer skill with internet search engines. Nevertheless the term stuck in my mind and I must admit it certainly summarises my experiences in equity investing over the last 12 months.

So firstly let us look at how the ASX 20 fared in this sea of uncertainty over the last 12 months. For many superannuants some components of the ASX 20 are the favoured investment destination. The ASX 20 contains 20 components (which may seem an obvious statement) however most investors tend to concentrate their holdings in the ASX 10 which includes the 4 major banks, two mining companies a Telco,  a couple of insurance companies  and two rather large diversified consumer goods suppliers. These companies will always be around and they have relatively high dividend pay -out ratios and those dividends are fully franked. So that is why investors hold them and as they hold a number of companies in the same industry group the portfolio is appropriately diversified.

The last 12 months hasn’t been all that kind to the ASX 20. The price index for the last 12 months reveals a decline of 12.09% with only 5 of the components producing a positive return. The 5 companies that did provide a positive return are pretty much outriders and include the two Westfield Trusts, CSL, Brambles and Transurban. As these companies either pay low dividend or unfranked yields and meddle in property, serums and infrastructure or base their business overseas they rarely get a look in in the standard superannuation fund portfolio.

As the large proportion of ASX 20 holdings in portfolios are centred on the worst performers in the index, such as BHP,QBE, Woolworths and a couple of the banks the performance of share portfolios would have generally suffered considerably more than the index decline would suggest in the last 12 months.

A review of the ASX 20 chart shows a considerable decline at certain periods during the year and the sea of uncertainty has pitched and fallen dramatically due to certain political and economic events. Take Brexit for example or the decline in commodity prices, especially oil and iron ore. Fears of a China slowdown and volatility in that country’s share market. Low interest rates in Australia and overseas has stretched equity valuations to breaking point.

I believe that these conditions will generally be with us for some time yet. So what do you do to avoid slipping off the life raft and into the shark infested waters of the sea of uncertainty.

Well it has been a practice of mine and when I can convince others to follow that including an Absolute Return Strategy to complement your direct Aussie share portfolio may be the way to go to avoid the unpredictable waves you may encounter in the sea of uncertainty.

Without naming specific investments or fund managers an Absolute Return strategy can incorporate a number of different strategies to smooth returns over a long period of time. The strategy aims to deliver positive returns in both rising and falling markets.

An Absolute Return Strategy may not shoot the lights out like a long only Aussie equity strategy may do in an upward market but it will have sufficient downside protection built into the strategy to largely protect the capital value of the portfolio. There are numerous managers out there that provide such strategies and incorporate the certain features such as:

  • Internal gearing
  • Short selling
  • Buy/write strategies
  • Holding cash rather than being fully invested
  • Hold commodities or precious metals

Such strategies tend to be less focussed on investing in the share market trends and more on providing the predictability of share returns over time and manage capital loss risk.

Of course everyone has a different risk appetite and the transparency of holding a parcel of direct Australian shares which fund pensions and income requirements is always appealing.

However if you accept that equity markets are to experience continued volatility and disruption having a look at some of these strategies may cut the grief about long term investing and get you back out of the water and onto the life raft as you navigate the sea of uncertainty.

Tony Simmons and BDO Private Wealth Advisers (SA) Pty. Ltd are Authorised Representatives of Godfrey Pembroke Limited ABN 23 002 336 254, an Australian Financial Services Licensee, Registered office at 105 –153 Miller St North Sydney NSW 2060 and a member of the National Australia group of companies.

Any advice in this publication is of a general nature only and has not been tailored to your personal circumstances. Please seek personal advice prior to acting on this information.

Before making a decision to acquire a financial product, you should obtain and read the Product Disclosure Statement (PDS) relating to that product.

Past performance is not a reliable guide to future returns.

Opinions constitute our judgement at the time of issue and are subject to change. Neither, the Licensee or any of the National Australia group of companies, nor their employees or directors give any warranty of accuracy, nor accept any responsibility for errors or omissions in this document.