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Weathering the storm

CA Magazine asked a number of prominent players in the investment field to offer advice on the best ways to manage a portfolio in face financial of financial squalls. Read what Turcan Connell Partner and Head of Asset Management, Alex Montgomery, had to say.

“May you live in interesting times” is said to be an ancient Chinese curse and the recent performance of financial markets has certainly been interesting, ironically in part because of the accelerating Chinese economy, Alex Montgomery writes.

Humans routinely swing from over confidence to excessive pessimism, so economies have always been, and will always be, cyclical.  The credit boom was all about confidence which began to ebb last summer as evidence grew that over-enthusiastic lending would come back to haunt the management of many banks.

At the same time, evidence is growing of rising inflation, weakening US and UK house prices and a much more fundamental change: the leadership of the global economy moving eastwards. 

Examples of the impact of these major themes can be seen in the divergence of some key sectors of the FTSE All Share Index.  In the year to the end of June 2008, the worst performing sectors have been those exposed to UK consumers, with financials down 32 per cent and consumer services down 31 per cent.

At the other end of the spectrum, companies benefiting from the appreciation in global commodity prices have prospered, with basic materials rising 31 per cent and oil and gas up 8 per cent over the same period. 

Should investors be clinging to cash and index linked Government bonds, or is this the moment to be brave and pick up undervalued assets? Timing, diversification and a willingness to move against the herd are, as always, key tools for investors. 

No-one will ring a bell to mark the bottom of this down-swing in markets and it is not realistic for anyone to expect to catch it precisely.  Investment portfolios should contain interests in a range of asset classes, be tuned to suit the time horizons and risk tolerance of the investor, and be positioned to avoid ever having to sell equity or other volatile assets in times of weakness.  Our approach is to blend interests in long equity vehicles (both region-specific and global in perspective) with exposure to fixed interest, commercial property, private equity, hedge funds, structured vehicles and other “alternatives” such as infrastructure funds.

Exposure to some asset classes, such as property and private equity, is now available at wide discounts to asset value.  The alert and opportunistic will find areas with attractive pricing that represent long-term value for patient investors.   

© CA Magazine August 2008