Go For Variety: Diversification Is Key
In uncertain economic times, global diversification in multi-asset portfolios is a key way to help investors optimise investment returns and reduce portfolio risk.
Diversifying their assets both by geography and asset class, with a broad and balanced allocation across a range of traditional asset classes and alternative investments throughout the investment cycle, is the most prudent approach to take in an increasingly volatile market, according to Fan Cheuk Wan, managing director and chief market strategist in Asia at HSBC Private Banking.
“Investors are seeking a more systematic and disciplined approach,” says Fan. “I think this is particularly important now. We are entering the very late stage of an extended economic cycle. We are also approaching the 10th anniversary of the post-Lehman expansion cycle in July 2019—this is the longest recovery in modern history and there are growing worries about global recession risks.
Global diversification for sustainable returns
“At this late stage, we expect higher return dispersion and increased market volatility. It requires a robust and stringent investment process to reduce portfolio risk and improve investment outcome.
We strongly believe that global diversification and multi-asset portfolios are important for sustainable and optimised returns.
That diversification involves a willingness to expand both the geographical range of investments and the types of assets held. “Our research studies suggest that more than 90 per cent of a portfolio’s return is attributable to its mix of asset classes. Therefore determining what proportion of your wealth is invested into each asset class is critical,” says Fan.
“Private investors in Asia are inclined to stick to a strong home bias, they invest in what they know the best,” she continues. “Since the 2008 financial crisis, we have noticed a gradual and subtle change in investment trends in the region. Private investors have learned a painful lesson about elevated risks because of over-concentrated positions in their home markets or single asset classes. More and more investors, especially UHNW individuals, family offices and millennial investors, appreciate the benefits of multi-asset diversification.”
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The rise of alternative investments
According to Fan, the most popular asset classes for private investors in Hong Kong has been local real estate and the Hong Kong/ Mainland China stocks; now there are more and more investors seeking opportunities outside their home markets in order to reduce the risk of over-concentration and seek for new sources of returns. Diversification helps to optimise the outcome of their portfolios.
“I see growing demand locally for multi-asset portfolio solutions with exposure to developed market equities and fixed income, as private investors in Hong Kong may find it challenging to invest in the international markets by themselves,” says Fan. “There is also a strong demand for yield-enhancing asset classes, which act as an alternative to liquidity, as cash can hardly generate returns in this lower for longer interest rate environment. Since the Federal Reserve has turned patient last December, there has been strong inflow into the Asian credit market in search for yield.”
In addition, there has been a sharp growth in alternative investments in Asia over the past decade, as new opportunities arise from the new economy sectors. Private equity investments have become more popular among Asian investors, especially in Greater China. Industry statistics from HSBC Private Banking show that Asia Pacific accounts for 26 per cent, or US$883 billion in assets under management of the global private equity market, versus only 9 per cent from a decade ago.
“For our alternative investment offering, the key is the focus on manager selection,” says Fan. “Especially in the private equity space, it’s increasingly challenging for private equity funds to find attractive investment projects at reasonable prices. Investments are often in emerging industries, and it requires a highly sophisticated skill set to pick the right projects.”
Manager selection is a key area where Fan’s team at HSBC Private Banking can add value to their clients. Based on data from the bank’s 10-year capital market assumptions, alternative investments are expected to deliver a higher rate of return compared to other traditional asset classes over the long term.
“Alternative investments are at the core of our strategic asset allocation. Hedge funds strategies deliver on their objective of providing absolute returns coupled with downside protection,” says Fan. “Private equity investments offer uncorrelated returns and a premium in return for accepting the risk of less easily tradable assets, or the so-called ‘illiquidity premia’. We think it is crucial to diversify, and to be able to rely on a specialist team which can identify and capture illiquidity premia across a range of geographies and sectors.
“The private markets offer a diverse range of investment opportunities in the structural growth sectors, such as real estate investments in warehouses, data centres and logistics centres that are exposed to the technological disruption of e-commerce and cloud computing. Identifying these structural growth opportunities in the private markets requires a very sophisticated, specialised asset manager with credible track record.”
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