How to shield portfolio from Trump factor
I RECENTLY visited the world’s second most indebted major country, namely Italy.
As I have previously reported, there are few signs of financial stress, and la vita remains distinctly dolce.
Arriving at Turin airport’s car rental desk, we were, as usual, offered various collision damage and theft waivers and, as usual, I turned them all down.
The basic rental – a reasonable €35 per day – exposed us to a total liability of €2,000 in the event of an accident and €3,000 in the event of theft.
For the princely sum of €200 all that liability would disappear.
Tempting, eh? But I haven’t had an accident since 1982 and never had a car stolen, so the chances of it happening weren’t great.
For years my policy has been to “self-insure” on such low probability, low liability risks (I do insure my house!), and I know I have saved more than enough to pay for the odd thing that might go against me in the future.
Here at Investec Wealth & Investment, portfolio insurance is something we are always thinking about, especially as we enter a period of potentially higher politically-inspired volatility, particularly given the Hillary Clinton and Donald Trump presidential battle.
The election outcome is deemed to expose investors to “asymmetric risk”, that is to say that the downside of a Trump victory would be greater than the upside of a Clinton win.
That wasn’t so bad when Clinton was well ahead in the polls, but with Trump gaining ground, the risks are rising.
The trouble with buying market insurance is that it is costly.
Option premium fades to nothing if not exercised, and anything involving futures tends to suffers from the roll from one contract to the next. In a world of low returns, leaking one per cent or so every year to sleep more soundly is a high price to pay.
We prefer, instead, to address the issue via portfolio construction, balancing our weightings of equities, bonds, cash and alternatives according to the market outlook and clients’ risk appetite. John Wyn-Evans is head of investment strategy at Investec Wealth & Investment