x Abu Dhabi, UAEWednesday 17 January 2018

Securities should be able to bounce back when times are hard

Nigel Murdoch, the managing director of BlackRock Middle East outlines five topics to discuss with your financial adviser before investing in this new world of volatile markets and low confidence.

Despite the economic downturn, mixed securities still offer the best opportunity for gain over the long term. Muhammad Hamed / Reuters
Despite the economic downturn, mixed securities still offer the best opportunity for gain over the long term. Muhammad Hamed / Reuters

In this new world of investing in volatile markets and low confidence, Nigel Murdoch, the managing director of BlackRock Middle East, the asset management firm, says portfolios should be flexible enough to adapt to rapidly changing conditions to allow investors to search for better returns. Here, he outlines five topics to discuss with your financial adviser.

1 Rethink the cost of cash

We often consider cash as a safe haven in times of uncertainty, when stock markets and sovereign bond yields are falling. The rationale is that the original sum invested does not diminish with market movements and regular interest payments should add to the total amount of cash over time. Holding some cash - to meet short-term requirements while waiting to take advantage of other new investment opportunities - is a sensible decision. However, the perceived risk-free nature of cash comes at a price. In the long run, cash investments are unlikely to provide high enough returns to enable savers to achieve their long-term goals, particularly when the erosive effect of inflation on the actual spending power of cash is taken into consideration.

2 Go further for income

The search for income has rarely been so challenging. Yields on traditional low-risk bonds, such as treasuries, bunds (the German government's federal bond) and gilts are at historically low levels, offering investors little more than 2 per cent. The good news is that there are sustainable and even rising income streams out there for those who know where to look and have the risk appetite to act. In a variety of markets, many companies that pay dividends are delivering twice the yields of benchmark government bonds. Those with the potential to grow their dividends offer an attractive chance for both income growth and capital appreciation. Seeking out these companies that pay a regular income in the form of dividends rather than just pursuing short-term growth in the value of shares is something every investor should seek. Investors can also seek out more attractive yields in corporate high-yield and emerging-market sovereign bonds.

3 Open your eyes to alternatives

Don't put all your eggs in one basket might be an age-old adage, but it is often a good rule of thumb when constructing your investment portfolio. Investing in the broadest set of opportunities possible - across markets, asset classes and styles - often helps to smooth returns, thereby reducing risk. In a similar vein, skilled fund managers also benefit from having the widest choice of tools and techniques at their disposal, including advanced programmes to assess risk, or strategies allowing managers to express views on stocks they both like and do not like. In this endeavour to broaden the investment opportunity set, alternative investments may have some role to play. These strategies generally use sophisticated techniques - often involving derivatives, or invest in niche areas of the market - and are playing an increasingly important role in investors' portfolios. While these alternatives were once the preserve of institutional investors, they are becoming available to a wider group of investors.

4 Be active about passive

Investment strategies can broadly be divided into either active management or passive management. An actively managed fund is exactly that - actively managed by financial professionals who usually try to outperform a specific benchmark. In contrast, passive funds, such as exchange-traded funds (ETFs) or index-tracking funds, generally track an index with no active stock selection. Financial experts have long debated whether investors should use either active or passive strategies. In today's new world, the answer is not active or passive: it is both. Passive investing can reduce costs and reduce the risk of underperforming a benchmark or index. Active investing has the potential to boost returns by outperforming a particular benchmark, but there are increased risks and no guarantees that the performance of the benchmark will be matched or exceeded.There is a place for active and passive investments in a well-diversified portfolio.

5 Use your longevity

Since when is living longer a problem? In these uncertain times of low returns and stock market volatility, people are thinking longer and harder than ever before about whether their retirement savings will deliver the standard of living they hoped for. These days, we're all living longer, healthier lives. In many countries, the responsibility of saving for retirement has shifted squarely to the individual and people worry about outliving their assets. This means many may need to rethink their financial plans for retirement. The prospect of living longer allows us to expand our investment horizon well beyond the day we retire. Today's 50-year-old investor might look at investing with a 25-year time horizon. Even a 65-year-old couple could consider maintaining carefully tailored exposure to assets such as equities, commodities and alternative strategies for longer - if their risk appetite allows - giving them a better chance of generating the level of income and capital growth they require over the longer term.