The ongoing uncertainty about the impact of Brexit, stock market volatility, inflation and interest rates make for a challenging investment environment. TIME Investments’ survey of independent financial advisers found almost half (48%) expect volatility to increase for domestic equities this year.
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].
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.
However, while the logic of derisking a portfolio in uncertain times is clear, investors cannot afford to sacrifice too much in the way of return. Nearly three-quarters (74%) of IFAs say clients are concerned about maintaining performance while moving out of equities.
Alternatives to equities
Advisers need to find alternative strategies that limit some of the exposure to the volatility of the stock markets, without eradicating meaningful returns. 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 benefit from the income generated by a long lease on a commercial property and typically offers a less volatile journey than that of equity investments.
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.
Commenting on the shift to lower risk, defensive investment strategies, Henny Dovland of TIME Investments said:
“Last year saw a relatively volatile UK stock market and the outlook does not predict a return to calmer conditions. 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.”
Dominic Key, Investment Director at Leodis Wealth said:
“More of our clients are concerned about the economic and political climate, particularly with Brexit just around the corner. We are increasingly looking at defensive investment strategies for those who want to reduce their exposure to the vagaries of the stockmarkets but still want enjoy to steady returns.”
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. 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 removes stock picker bias while the active overlay allows manager 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.
Research conducted by PollRight among 65 UK-based professional financial advisers during February 2019.Posted: 23/08/2019 Categories: Income, Infrastructure, News, Press, TIME:Defensive Income Securities