What fund managers are advising investors

Summary: Investment managers are not scared off by the market volatility and recommend investors act prudently.

Key take-out: Fund managers are advising investors to be cautious, and to keep some powder dry.

In the current markets conditions, good advice goes a long way. So we asked leading investment managers from around Australia and overseas to give some words of advice to investors on how to respond.

This is the final article in our three-part series in which we asked a group of Chief Investment Officers, senior portfolio managers and investment managers “What do you see as the main challenge for markets in 2019?”, and “Where fund managers are looking to buy”.

As expected, the responses are varied, but there are some common themes around investing for the long term, diversification, and the importance of switching off from the daily market distractions.

Below are there responses to the question, “What advice do you give to investors?”.

Jacob Mitchell, Founder and Chief Investment Officer, Antipodes Partners

Both Developed Asia (Japan, Korea and Taiwan) and emerging markets stand out as regions with greater return potential.

David Macri, Chief Investment Officer at Australian Ethical Investment

Investors in equities should be focused on the long term and avoid the temptation to ‘time the markets’. A longer-time horizon enables investors to ‘ride out’ the volatility and be rewarded for the higher risk they are taking. Risk-averse investors or those that have a shorter time horizon should consider diversifying their portfolio or investing in a multi-asset class fund or indeed invest solely in defensive asset classes. My other advice is for investors to seek professional advice from a financial adviser.

Julian Beaumont, Investment Director, Bennelong Funds Management

Investors should remember the world of investing is always uncertain. Today’s big issues will be different to tomorrow’s. The advice is to avoid betting on the future, but to invest in a diversified way that deals with whatever the future holds. Don‘t get scared out of equities, particularly if sentiment weakens. Equities actually look relatively attractive at present. Valuations are around historic levels – in contrast to most other asset classes – and any patience required is rewarded with attractive dividend yields.

Scott Kelly, Portfolio Manager, Income Portfolio, DNR Capital

Invest when others are fearful and be cautious when others are greedy. Buy good-quality investments with strong market positions, good balance sheets and strong returns when they are out of favour.

Stephen Miller, investment adviser, Grant Samuel Funds Management

Generally, I would consider diversifying away from ‘beta’ in both equity and bonds to more ‘absolute return’ or ‘unconstrained’ focussed portfolios. In equities this may mean greater emphasis on ‘stock picking’ (both long and short) and in bonds it may mean focussing on portfolios less sensitive to standard benchmarks. To the extent it is possible, greater exposure to private assets (equity and credit) are also attractive. By their nature private assets seek to harness ‘off benchmark’ opportunities and / or liquidity premia.

Mark Arnold and Jason Orthman, Chief Investment Officer and Deputy CIO, Hyperion Asset Management

Beware short-term market noise and invest in quality. In times of heightened volatility, like now, it can be difficult not to get swept up in market sentiment. Low-cost debt and consumer demand propelled by easy monetary policy has helped some average businesses and speculative stocks perform over the past 18 months – but this will not continue.

Only businesses with strong fundamentals will survive – fundamentally solid business propositions, strong management, large and growing addressable markets, a high-quality business franchise and the potential for organic (not debt-fuelled) growth.

Nathan Bell, Senior Portfolio Manager, InvestSMART Group

Given the number of profit downgrades recently, and further compression of price-to-earnings ratios, 2019 could provide a wonderful opportunity to upgrade your portfolio from the typical ‘mum and dad’ stocks, which lack growth or consistent profitability. Having a watchlist of valuations or prices that you’d buy these stocks at will keep you focused on the businesses, rather than the harrowing headlines that over-dramatise short-term issues. 

Christian Obrist, Head of iShares, Australia

2019 will be a challenging year but there are still growth opportunities. We prefer to take economic risk in equities, rather than in credit. And we see US government bonds as a source of ballast in portfolios. Look for alpha in areas like emerging markets, where the risk-adjusted rewards are more promising whilst balancing your portfolio by diversifying into areas which offer decent yield at low risk, such as short duration and quality bonds/ treasuries. In commodities, we see oil near the bottom and believe selected energy equities look attractive, whilst defensive positioning in gold should benefit from a likely topping out process in the US dollar and ongoing risk aversion. 

Jay Sivapalan, Co-Head of Australian Fixed Interest, Janus Henderson

In many ways, 2018 was a year when we witnessed the shift in market thinking from the past decade where ultra-easy monetary and fiscal policies had supported economies to one where, at least in certain economies like the US, the degree of policy accommodation needed to be reined in. We think this paradigm shift will accelerate through the course of 2019. As such, our portfolio strategies will take this dynamic into account and we think a very flexible approach when dealing with both interest rate and credits risks will be paramount in navigating 2019 and beyond.

Overall we continue to expect yields to rise further in 2019 and for the yield curve to become flatter as this occurs, but the broader trend is for a higher rates structure. Ultimately this is good for investors, but we do need to manage the journey along the way.

Aaron Binsted, Portfolio Manager, Lazard Asset Management

Don‘t be complacent and understand what your risk exposures are. Financial markets currently look stretched, the return outlook from the wider market or indices is poor, and the risk of negative drawdown is elevated. We believe investors will need to concentrate their Australian equity exposure in those stocks that are attractively priced and limit their exposure to major risk factors in order to generate an adequate return. With the local economy likely cooling it may pay to be invested cautiously in companies that have robust cash flow, and are not overly geared.

Reece Birtles, Chief Investment Officer, Martin Currie Australia

We believe investors should avoid paying too much for growth/quality stocks that have outperformed and appear overvalued on our metrics. We prefer sectors that are leveraged to the consumer, such as consumer staples, strongly positioned consumer discretionary and owners of quality shopping centres, which have attractive valuations compared to a year ago. We expect better investment opportunities to arise further into Australia‘s economic cycle, so we suggest investors retain some dry powder in safer real asset, defensive exposures to deploy later into the cycle.

Nick Griffin, Head of Investments, Munro Partners

Be patient. The negative macro headlines will dissipate, and volatility will subside, resulting in a better environment for investing. When you do invest, do so in increments and focus on buying quality companies that can continue to grow their earnings despite a more difficult economic backdrop.

George Latham, Chief Investment Officer, Pengana WHEB Sustainable Impact Fund

When we consider the stage of the economic cycle and the gradual withdrawal of quantitative easing, a sustained increase in volatility would not be surprising. In such circumstances, the performance of market sectors and even the performance of individual stocks is likely to diverge from that of the index as a whole. We expect this to provide opportunities for differentiation in returns as the skills associated with finding and investing in resilient businesses that are able to grow earnings in more challenging conditions become more prominent. We accordingly expect active management to add significant value in the foreseeable future. Opportunities associated with the growing focus on environmental, social and governance (‘ESG‘) analysis will add further grist to this mill in 2019.

Paul Moore, Chief Investment Officer and Portfolio Manager, PM Capital

Whatever your framework, you want to be more conservative. It‘s not like the post-GFC period where you could go hard. The tide has definitely changed – you want to keep some powder dry and not get fully extended. You‘re going to have to be very patient and be ready to nibble away at stocks when you see the downdrafts. If markets run up, be happy to go quiet for a while. Never be fully committed because there‘s a lot of opportunities and you‘ll want to be ready for them. 

Dr Bob Baur, Chief Global Economist, Principal Global Investors

Since financial markets may struggle, it‘s time to be cautious. The stock market will likely have a year-end rally as the Fed stays gradual, earnings excellent and global growth robust. If it comes, we‘d use the rally to take some profits and preserve capital. If long-term interest rates move higher into year end along with stocks, we‘d extend fixed income duration. Passive investing may not work with stock market beta in short supply; stick with conservative active managers.

Beverley Morris, Director, Rates & Inflation, QIC Global Liquid Strategies

For fixed income investors, the gains from easy financial conditions and credit market tailwinds are behind us. With more volatility, there comes opportunity. Skills in security selection will become more important as dispersion of returns will rise. It is imperative that investors partner with investment managers with the experience and strong track record of managing through various environments to deliver active returns through what is likely to be a bumpy path in the next cycle.

Peter Wilmshurst, Portfolio Manager, Templeton Global Growth Fund

While the easy gains for global equities look to be over as US growth moderates, a rising rate environment can lead to a shift in focus to unloved stocks and regions. The ultra-low interest rates of the post-GFC era have assigned more value to stocks with significant long-term potential, as their predicted future earnings are assigned a higher present value. Rising rates mean that these future earnings have less value than they would if rates were near zero. It is likely this move to higher interest rates will trigger the long-awaited rotation out of the expensive growth stocks that have led this market cycle and into historically cheap value shares.

Jun Bei Liu, Portfolio Manager, Tribeca Investment Partners

Volatile markets call for strong investment convictions, and investors should focus on what they know best and that is to focus on the fundamentals of the companies and stress test assumptions. Share prices will follow the earnings sooner or later. Market volatility creates an enormous amount of opportunities and it pays to be a contrarian and to take a longer-term view. Don‘t follow the herd.

Jonathan Baird, Investment Specialist, Western Asset Management

There are currently a number of risks where it is challenging to quantify both the probability of escalation and the materiality of such an event. Such uncertainty only emphasises the importance of active management and true diversification. Where possible your portfolio must contain different strategies that should perform in a range of potential market environments.