Becoming more active, investing more of your portfolio in Asia and thinking differently about market classifications are three long-term trends that investors will need to consider even after the coronavirus pandemic dissipates, according to Fidelity International’s Paras Anand.
Anand, chief investment officer for the Asia-Pacific region, said it is normal for investors to become cautious when there are periods of volatility such as now.
“Capital preservation becomes the primary consideration,” he said.
“However, to paraphrase Warren Buffett, whenever fear becomes the dominant sentiment, long-term investors need to think about where to be greedy.
As such, Anand said investors need to focus on longer-term trends rather than chasing yield or focusing on low volatility equities.
“While these have been dominant themes in markets for a decade, such ‘expensive defensives’ may in time be more vulnerable than is currently appreciated,” he explained. “Especially if central bank intervention is seen to have little impact on demand in the real economy, exposing a small margin of safety.”
Instead Anand has identified three long-term themes that investors should be focusing on.
‘Get active’
The first long-term theme that investors should start thinking about is active investing, after years of inflows to passive strategies.
According to data from the Investment Association, tracker funds under management stood at £232bn as of the end of January, representing 17.5 per cent of total industry funds under management.
“We have seen passive strategies boom in terms of flows over the last decade and they now constitute a significant part of the of the ownership of the markets and an even greater part of daily flows,” he explained.
“A period of rising asset prices boosted by easy monetary policy has made this a smart allocation, especially in US markets.
“Now, however, it’s worth considering whether active strategies should become a greater focus for investor portfolios.”
There are three reasons that investors should take a more active approach, according to Anand.
“First, periods of higher market volatility will always strain the ability for trackers to accurately reflect market return, so there is a higher chance these strategies return less than the benchmarks that they are replicating,” he said.
“Second, an extended period of popularity for passive strategies – and other forms of factor or rules-based investing – has meant a greater focus for active managers on clarifying their processes and improving portfolio construction, while incorporating sustainability measures to more holistically assess corporate risk.
“Finally, after a period of extensive dislocation between asset prices and underlying valuations, the prospect for active returns has never looked better.”
‘Look to Asia‘
While it might seem counterintuitive with the coronavirus having impacted the Asia-Pacific region first, it remains an ‘undeniably attractive allocation for the coming decade’, said the Fidelity strategist.
“To start at the simplest level, today Asia represents a much greater proportion of global economic output than is reflected in most global equity or bond indices,” he said. “But it’s clout in terms of both GDP and share of investment allocations will rise at a significantly higher pace than the global average.”
Notwithstanding the recent news flows, said Anand there are several short-term positive drivers for the Asian market that will become more evident over time.
The first and most obvious driver, said Anand, is that a period of lower oil prices will lead to a benefit for industry and consumers across the region, and net importers like China in particular.
Secondly, the Fidelity strategist said, a decade-long rise in the value of the US dollar has placed a funding strain on Asian economies that now appears to be turning.
“Finally, as the prospects for Asia as a whole are increasingly tied to China, recent concerns around state of the Chinese economy, the impact of the Covid-19 outbreak and trade wars have led to lower valuations across the board,” he added.
‘Rethink market classification’
The final theme that investors will need to think about in the long term is the challenge of overcoming traditional market classifications, particularly given the amount of disruption taking place.
“Traditional market and sector classifications are looking increasingly clunky as a way of trying to determine preferred – or less preferred – exposures,” he said.
“This is especially true when it comes to ‘developed markets’; what we see is that the country where a security is listed has increasingly little to do with its scope of operations, sources of revenue or its primary trading currency.”
The UK is a good example, he said, particularly given the international make-up of the FTSE 100 companies where two-thirds of income comes from overseas operations or subsidiaries. Furthermore, the rate of corporate change makes industry-based classification harder.
“As investors think about navigating this period of turbulence, some of the best opportunities are in themes with secular growth that cut across industry and market classifications” said Anand.
“Investing around themes has, in many cases, justifiably come in for a lot of criticism as some of the most resonant ideas can be very specific (e.g. ‘robotics’ or ‘shale oil’).
“Think of the thematic approach more as an interesting way to redefine the larger opportunity set, rather than a way to mine a narrow seam.