The Final
Word 2021 One of the most-repeated views over 2021 was that the ‘60/40’ portfolio is dead, given the ultra-low to negative yields offered in many parts of the sovereign bond markets. From alternatives to commodities to private credit, how are you helping investors to allocate assets in what was traditionally the fixed income part of their portfolios?
Tee Fong Seng, CEO Asia-Pacific, Pictet Wealth Management A classic 60/40 portfolio may be suboptimal at times of higher inflation. From a strategic asset allocation perspective, the expected rise in inflationary pressure, in part because of energytransition policies over the next ten years, is a further argument in favour of endowment-style investing, i.e. the multi-asset approach adopted by endowment funds which include a range of real assets (private equity infrastructure, real estate, commodities and gold) that may protect against inflation. We believe that alternatives, including real estate and private equity, will continue to grow this year. Super-low interest rates and rising inflation fears mean the yields offered by traditional assets have plummeted, increasing the number of investors willing to exchange some liquidity for the higher returns offered by private investments. In alternatives this year, we like real assets that can cushion against inflation, private equity as a growing asset class with low correlation to listed assets, as well as hedge fund solutions such as M&A, eventdriven, and macro strategies. Tan Siew Meng, regional head, Asia Pacific, HSBC Global Private Banking It is imperative for investors to find new portfolio diversifiers among a broader universe of alternative asset classes. Introducing alternatives such as hedge funds or private assets into a portfolio can deliver better risk-adjusted returns than a portfolio of public markets alone. In 2021, HSBC Global Private Banking concluded another record year in Alternative Investments by raising US$3.2 billion in private client commitments globally, with US$1.9 billion from Asia, an increase from the US$2.3 billion raised in 2020. Volatility is trending higher and rising rates are limiting the ability of low-yielding bonds to diversify risk. As rates rise, investors need to change tack to stay on track. More companies are choosing to remain private and for longer periods than ever before, providing a growing universe of private market opportunities. Our private market solutions have proven resilient and delivered strong risk-adjusted returns in
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spite of market dislocations. We believe private markets are complementary to clients’ public market holdings, and expect the private market illiquidity premium to keep attracting investors and fundraising momentum to remain strong. For 2022, we see a broad opportunity set for alternative investments and consider them to be a key portfolio diversifier, providing downside risk protection and uncorrelated returns. Raymond Ang, global head, Affluent Clients, Standard Chartered Bank We have been advising clients to increase allocation to private assets, primarily private credit and private real estate. This is driven by our expectation that yields and returns in these areas are likely to be superior to similar assets in the public markets – for instance, we expect global high-yield bonds to generate returns of just 2.3% a year over the coming 7 years, while for private debt that number is 5.3% with only slightly higher volatility. Of course, these assets have some diversification benefits as well when added to an equity-heavy portfolio, although the hedge is less pure than for G3 government bonds. Omar Shokur, CEO Asia, Branch Manager Singapore, Indosuez Wealth Management Whilst the fixed income allocation in our model portfolios has reduced somewhat (ranging from 28% in conservative portfolios to 10% in more dynamic portfolios), it remains an important asset class. Clients can still achieve stable income through balanced and prudent selection in duration, sectors and regions, spreading the risk within their portfolios. Having said that, as mentioned above, we continue to deploy multi-asset portfolios and advise investors to add gold and private equity in addition to the assets mentioned in the previous question. Michael Blake, Asia CEO, Union Bancaire Privée With both nominal and real interest rates at ultra-low levels, traditional fixed income no longer offers the diversification benefits it used to
offer in a conventional 60/40 portfolio. What’s more, one of the key pillars underpinning the strong equity market performance since the global financial crisis of 2008 has been the unconventional monetary policy of quantitative easing. This makes risky assets generally susceptible to increases in interest rates, so that a traditional fixed income allocation becomes somewhat positively correlated to equity markets. This acts to reduce the diversification benefits in a conventional 60/40 portfolio. During this cycle, we have used innovative ways to bypass the limitations resulting from the conventional 60/40 allocation. That is why we have chosen to be overweight equities at the expense of fixed income, as we find more value in the former. The role of risk reducer — which conventional fixed income used to play in volatile times for equity markets in a 60/40 portfolio — has now been replaced in our portfolios with downside protection derivative strategies and structured products. With volatility at relatively low levels, these strategies offer reasonably cost-effective downside protection. We also use lower beta, alpha generating exposure via alternatives to help mitigate risk in portfolios. Turning to our fixed income allocation, our reduced exposure to the asset class over the last few years has primarily comprised various sub asset-classes within fixed income which correlate more positively with the business and economic cycle. This includes areas such as high yield, hybrid capital structure securities, senior loans, emerging market debt and convertibles. With these sub-assets now starting to look expensive, we are increasingly looking to use more alternative long/ short credit strategies within portfolios as a partial substitute. We have tactically entered and then exited sovereign bond market exposure to trade the range which yields have largely moved within. Whenever client investment objectives and risk appetite permit, we advocate the use of private debt and other yield generating private market exposure. Lok Yim, head of Deutsche Bank International Private Bank APAC We should not assume that a very traditional asset allocation (such as the classic 60/40 equity/bond
