Investors must get on with portfolio rebalancing I

nvestors increasingly find themselves in a Catch-22 situation today. With almost $16 trillion worth of bonds worldwide, mostly issued by European governments, offering negative yields, investors are sure to lose money if they hold on to these till maturity.

Yet, these bonds have behaved as safe havens over the past year — offering investors sizeable returns — amid concerns about slowing growth and inflation. Equity markets have failed to sustain their uptrend on these very same concerns.

The choice facing investors need not be binary. There are ways to navigate the world of lower interest rates and falling bond yields, but this would require a shift in mindset and attitude.

The solution lies in diversifying investments across geographies, asset classes and investment styles.

Spread them out

Let’s first consider the behaviour biases prevalent among investors. Studies suggest a typical investor is significantly exposed towards standalone investment ideas, with little consideration for risk. They are often concentrated in one asset class such as equities and have low exposure to bonds and other income assets.

And they are heavily invested in domestic assets. For instance, in many parts of Asia, the preference towards domestic real estate, equities and structured notes is clear from these studies.

A more prudent approach warrants a behavioural change. We lay out a few basic shifts in decision-making biases which could set investors on the right track:

Diversifying across asset classes: Those invested solely in equities or government bonds could consider investing in corporate and emerging market bonds. Although government bonds issued by many developed markets (especially in Europe and Japan) have provided good returns, many offer negative yields. In contrast, many investment-grade corporate bonds and emerging market dollar-denominated bonds offer attractive yields.

A basket of emerging market government bonds today offers yields above 5 per cent, without the investor having to take on the risk of depreciating foreign currencies. For those seeking safe havens, gold and the Japanese yen offer better alternatives to government bonds in the long term.

Looking beyond borders: Investors have a tendency to deploy savings only in their own, more familiar, market. As a result, they would have suffered low returns from equities this year. Hong Kong or Singapore domestic equities have gained about 6 per cent each in the first nine months.

However, a geographically diverse allocation would have provided better returns, with US equities delivering 23 per cent gains and Europe providing 16 per cent returns in Singapore dollar terms over the same period.

Exploring less familiar ideas and investment horizons, while staying diversified: The tech sector, for instance, may have been a rewarding theme. This raises the risk of anchoring, or “recency” bias, among investors.

The health care and related sectors could be more rewarding over coming years, with advances in medical sciences and new ways of delivering health care in a rapidly ageing society.

Thinking beyond real estate investments: Properties may have provided good returns as interest rates declined, but this trend has inflated prices to an extent that virtually ensures lower returns over the medium-to-long-term. Many investors count real estate as their main, if not their only investment, raising concentration risk.

Rebalancing portfolio: Studies show some investors are prone to holding on to losers for too long as they are not willing to psychologically accept losses. There is a hidden cost here, as funds stay stuck in poorly-performing assets, denying an investor more profitable opportunities.

Others tend to sell at every sign of trouble. To remove this bias, a typical rule-of-thumb is for investors to rebalance their portfolio at least once a year to bring it in line with their desired asset allocation. This has the automatic effect of taking some profit on the winners and buying more of the losers cheap.

. . . . . Removing emotional bias

This is a disciplined way of “buying low and selling high”, which removes the emotional bias from investing.

The above examples show that a world seemingly flush with funds — which has driven yields on some of the highest quality bonds and stocks close to zero — does not necessarily equate to a world devoid of alternative investment opportunities. There are plenty of avenues to eke out healthy returns and earn a decent income.

The need of the hour is for a change in our behavioural approach towards investing.

■ Alexis Calla is Chief Investment Officer at Standard Chartered Bank’s Wealth Management division.