Faced with political and economic uncertainty, investors are reconsidering their investment portfolios. We ask whether it is time to derisk.

Investors are on the defensive and given the current economic and political background, it is not a surprise.

The ongoing uncertainty about the impact of Brexit, stock market volatility, rising inflation and interest rates make for a challenging investment environment.

Research from the National Centre for Social Research across more than 2,000 British citizens found that nearly half (47%) believe they will be worse off financially after Brexit[i].

Last year saw a series of ups and downs on the UK stock markets and the outlook does not predict a return to calmer conditions. TIME Investments has published a survey of independent financial advisers (IFAs) which found almost half (48%) expect volatility to worsen for domestic equities this year.

Political tensions between global superpowers have only added to the market uncertainty. The United States/China trade war remains ongoing, causing serious upset for America’s largest 500 stocks[ii].

Meanwhile, the UK’s economic policy saw a return to interest rate rises which was bad news for fixed income investors. However, following lower than expected growth forecasts for 2019, the Bank of England is not expected to increase the rate much above the current base rate of 0.75% for the rest of this year[iii].

Given this challenging and uncertain environment, IFAs say nearly one quarter (23%) of investors want to derisk their portfolios. Of this, three-quarters said this was partly driven by Brexit, nearly half (48%) attributed the extra caution to stock market volatility and just over a third (35%) said geopolitical uncertainty was a motivator.

 

Alternatives to equities

The logic of derisking a portfolio in uncertain times is clear, but investors cannot afford to sacrifice much in the way of return. Nearly three-quarters (74%) of IFAs say clients are concerned about maintaining performance while moving out of equities.

Advisers need to find alternative strategies that limit some of the existing exposure to the vagaries of the stock markets, without eradicating meaningful returns. At the same time, investors want to hedge their bets by investing in assets that do not behave in the same way as equities. More than a third (38%) of IFAs say that low correlation is one of the most important aspects when derisking a portfolio.

With this in mind, more than two-fifths (42%) of IFAs are recommending cash as a ‘safe haven’ alternative to the stock markets. However, while interest rates remain low it is far harder for cash to deliver meaningful income.

More than a quarter (26%) of IFAs recommend long income property as a less volatile way to invest for income over the longer term. Long income property allows investors to take a share of commercial rents and typically offers a less volatile journey than that of equity investments. [click here for more on long income https://time-investments.com/an-alternative-view-why-long-income-funds-offer-a-new-hope-for-income-investors].

In keeping with the demand for low correlation assets with predictable income streams, a quarter of IFAs point to alternative assets as part of a derisking strategy, while 23% recommend real assets, which could include infrastructure and renewable energy projects.

Corporate bonds – another traditional safe haven – are recommended by 25% of IFAs. This is despite more than two-fifths predicting a more volatile environment for the asset class in the next 12 months.

 

A defensive investment strategy

While it is possible to invest in any of these assets in isolation, combining them in a defensive investment fund offers a more holistic solution to the current market challenges.

Spreading investments across real assets, corporate bonds and carefully selected equities diversifies risk while targeting inflation beating returns; both of which offer some respite to the uncertain economic environment.

For example, TIME:Defensive Income Securities fund targets an annual income return of  5% from a portfolio of high quality,  less volatile investments in listed real estate, infrastructure and renewable energy companies.

Equities are carefully selected using a smart beta investment strategy which simultaneously removes stock picker bias while allowing managers to focus on the most appropriate defensive stocks.

A traditional stock picking – or active – strategy is vulnerable to an individual manager’s emotional bias and subjective decision making. In contrast, a smart beta strategy employs a sophisticated stock selection process which means equity holdings must have a lower level of volatility than the market average and deliver consistent and predictable dividend yields.

The result is a fund which targets a secure income with lower volatility.

TIME:Defensive Income Securities fund complements TIME:Commercial Long Income (CLIP) and TIME:Social Long Income (SLIP) which also offer defensive strategies. These two funds offer stable long-term cash flows with a degree of inflation protection, which are uncorrelated to the equity markets. CLIP invests in long income property [https://time-investments.com/our-products/time-commercial-long-income], while SLIP invests in social infrastructure assets such as care homes or educational facilities [https://time-investments.com/our-products/timesocial-long-income].

Staying safe

In an environment where nothing is certain, defensive investment strategies can go some way to insulating investors from the worst of market volatility. In the current environment, holding a diversified portfolio of assets that can outpace inflation, delivering stable income can make sense.

If you have any questions or would like to find out about any of our investment solutions, please contact us on 020 7391 4747 or questions@time-investments.com.

 

Defining a defensive investment strategy

A defensive investment strategy is designed to protect the investors’ capital while keeping pace with inflation. Strategies will include a spread of asset classes that target a reliable income stream, lower volatility and lower correlation to equity markets. This include real estate, infrastructure, long income property, renewable energy companies and certain corporate bonds. 


[ii]
https://www.bloomberg.com/news/articles/2019-01-08/trump-said-to-want-trade-deal-with-china-to-boost-stock-market[i] https://whatukthinks.org/eu/questions/do-you-agree-or-disagree-that-the-prime-minister-will-get-the-right-deal-for-britain-in-the-brexit-negotiations-3/

[iii] https://tradingeconomics.com/united-kingdom/interest-rate

Posted: 01/07/2019 Categories: Income, News, TIME:Defensive Income Securities