Portfolio construction crucial amid volatility


By Elizabeth Somerville

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Advisers need to pay more attention to portfolio construction and the role defensive assets play in assisting investors to weather volatile market conditions.

In an interview with financialobserver, Triple3 Partners chief executive Simon Ho said as the market was experiencing episodic volatility, some advisers would need to revise their portfolio construction techniques.

“Over the last few years it’s been very simple, just be long in assets and they all rise,” Ho said.

“I think now you have to pay far more attention to portfolio construction and also to think about defensive assets in your portfolio.

“Up until now, this hasn’t really been a factor – you could be long in whatever you want and it’s all really going to go up, but this sort of period is where you really distinguish between really good investing and not.”

This year was likely to experience bouts of episodic volatility triggered by potential catalysts such as oil prices, trends in emerging markets, the deceleration of China and the United States Federal Reserve potentially raising rates, he said.

“There’s a lot on the horizon that even if the Fed decides to delay the March rate hike, for example, the wheels are set in motion so you can’t replicate the tranquil environment of the last three years,” he said.

“It’s not as bad as the global financial crisis or the Greek crisis, but not like the last three years either, which is why it’s episodic.

“It’s driven by episodic events and we’ll see it spill over in volatility and affect every market.”

To respond to this, Grant Samuel Funds Management, working in conjunction with Triple3 and Epoch Investment Partners, launched its Grant Samuel Global Equity Advantage fund in October last year with an overlay applied to it to mitigate market volatility risks.

“This overlay technique is quite distinct from that which exists elsewhere,” Ho said.

“Essentially we use index options but we don’t just buy [the options] – that’s called tail-risk hedging, and we don’t believe in tail-risk hedging.

“It’s a dynamic, options-based risk mitigation tool.”

The firm had already received interest in the overlay and was in the process of refining it so it could be applied as a risk mitigation technique over other funds, he added.

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