What you can do in the face of lower local returns
With more pedestrian returns expected from local asset classes, you should compile an investment portfolio with a range of allocations to each asset class and that suits your risk profile, Peter Brooke, Old Mutual Investment Group’s head of macro strategy investments, says.
Such a portfolio will give your investment manager some flexibility to adjust your exposure to the asset classes in line with the opportunities in the cycles that are likely to characterise the market.
But John Kinsley, the managing director of Prudential Unit Trusts, argues that rather than starting with a risk profile, you should first establish the level of return you require from your investments over the next few years. This will determine the mix of assets necessary to produce the required return, and then you can check what risks that asset mix will entail, he says.
If the risk level is unacceptable, you will have to adjust the required return. Simply starting with risk does not address the return expectations of the investor, Kinsley says.
Brooke says: “With most asset classes currently fairly valued relative to each other, there isn’t an obvious ‘big opportunity’ for exceptional returns by being overweight in a particular asset class.
“For investors, this also means that as long as they are invested according to the correct risk profile, they shouldn’t have to worry about short-term switching or marketwatching. Perhaps these ‘boring’ conditions are good, as investors can focus on following their long-term plans after the rollercoaster ride of the last two years.
“In the short term, it’s important to remember that the local equity market has just enjoyed a 32-percent gain in share prices in 2009 and its largest-ever annual increase in price-earnings ratios, an astounding 82 percent.
“In 2010, the market should benefit from a recovery in company earnings, with at least a 25-percent earnings growth, but this is largely already in the price.”