Article written by Thierry Crovetto & Pierre-Yves Dittlot from TC Stratégie Financière
As it was the case last year, 2017 should not be all smooth sailing.
Despite the optimism generated by Mr. Trump’s election, many questions remain unanswered, especially around the implementation of the new President’s economic program and its impact on world trade. During his opening address at Davos’ economic forum, Chinese President Xi Jinping supported free trade by stating “no one will emerge as the winner of a trade war”. Within the present low interest-rate environment, generating returns over the long-run is more difficult than in the past. Past yields can no longer be taken as reference points today. In fact, while German ten-year bonds yielded 3.5% in 2011, today it is closer to 0%!
The present environment and the above-mentioned constraints are real challenges faced by a flexible, asset allocation or a bond investment strategies as they will all be forced to embrace more risk-prone management strategies. The adoption of a greater number of performance drivers has become a must and, in this respect, absolute return UCITS funds can be a solution in providing more attractive risk-reward returns within stable income-producing strategies. However, selecting and integrating such strategies within an asset-allocation plan requires a more complex in-depth analysis approach.
Moreover, an increasing number of investors are paying particular attention to the return of their portfolio. In fact, income is often used by investors to cover their daily expenses or interest paid on loans. This is even truer for individuals who no longer benefit from an occupational income. In this perspective, a portfolio construction that favors the fund’s distribution shares (in all asset classes) can be an appropriate response.
Portfolio managers can thus bring significant added value in a world where income-producing bonds are a thing of the past. Just like an architect, a portfolio manager will devise and combine the most attractive risk premia to provide returns offering the most attractive risk-return ratios. In addition, this kind of income is instrumental in making emotionally acceptable the unavoidable additional marginal volatility necessary to achieve performances comparable to those granted by “risk-free yields” only a few years ago. It goes without saying that the manager’s role is paramount, even more so than in the past, in weighing-in long-term capital appreciation for investors.
Finally, versatility and dynamic risk management have become the corner-stone of attractive risk-adjusted returns on investment. Not surprisingly, asset allocation has been identified by a number of academic researchers as the principal driver of future performance.
About the authors
TC Stratégie Financière SAM is an asset management company based in Monaco. As a firm that is closely-connected to the academic field, our approach focuses on research leading to both asset allocation advice and more complex quantitative models. From advisory mandates to “white label investment products”, we seek to maximize investment performance while minimizing drawdown. www.tcsf.mc