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IN THE wake of the savage bear market that ravaged most assets, financial advisers are making tactical shifts on client portfolios to preserve capital and reap returns. Several licensed advisers have set up 'alpha' portfolios alongside traditional model portfolios where strategic allocations remain fairly static.
These so-called alpha or dynamic portfolios are typically actively traded, using a range of assets as underlyings, including unit trusts, stocks and exchange traded funds. They are typically managed with an eye on absolute return, and allocations to cash can go as high as 100 per cent. Some firms have opted to structure their funds as unit trusts, which avoids having to seek client approval for every trade.
However, the funds are not hedge funds and may not hedge positions directly. Another caveat is that clients are relying on advisers' ability to read markets and time their shifts. This suggests clients should grill advisers on their asset allocation approaches and track records.
IPP Financial Advisers investment director Albert Lam says: 'One of the drawbacks of (traditional) balanced funds is that even if you dislike the market, you still have to be 40 per cent in equities. In our case, we can go up to 100 per cent in cash but we have set a maximum of 70 per cent in equities.'
Mr Lam is referring to the firm's Worldwide Investment Opportunities Fund, which it set up last October. The fund is opportunistically managed by an external offshore fund manager, advised by IPP. Elsewhere, Providend has set up alpha global portfolios since August last year, and GYC Financial Planning has its own 'dynamically' managed portfolios.
Providend chief investment officer Daryl Liew says: 'We have hit our target return for the year.' The balanced fund aims for a 7 to 8 per cent annual return and is currently about a third in cash. Mr Liew doubts the sustainability of the recent sharp rally. 'When I look at markets, I don't see fundamental drivers to explain why they should be up so much in so short a time,' he says.
New Independent chief Joseph Chong set up an active portfolio service called Fulcrum to trade ETFs, with the ability to short assets through inverse ETFs and to leverage on the long and short sides.
'I look for the best ideas,' he says. 'The portfolio will underperform when the market is frothy but outperform when it is doing badly. Returns pile up over time.' On loss management, he says: 'Whatever the price we pay for a security, it has no bearing on our decision-making. If the fundamentals are not right, we cut and move elsewhere.' He is optimistic on corporate profits and markets, though he is looking to short some markets.
Private banks, likewise, are actively monitoring client portfolios, with increasing scrutiny of risks. The difference from licensed financial advisers is that clients' large accounts allow tailored risk management. The portfolios, for instance, may tap derivatives - often bespoke contracts - to hedge positions and protect portfolios on the downside.
Jennifer Tay, Citi Private Bank managing director and head of investments advisory and sales, sounds a note of caution on 'ad hoc' and active 'capital market trades'. 'We continue to subscribe to the view that investors need to have an overall asset allocation plan rather than adopt an ad hoc approach to investing,' she says. 'Deliberate allocation to different asset classes and across geographies should help reduce volatility and avoid large losses.'
Amid last year's crisis, correlations between asset classes converged to '1' - signifying perfect correlation. But that was probably a 'black swan' year.
'The allocation to capital market trades should be kept to no more than 10 to 30 per cent of a client's total liquid assets and a stop loss discipline is critical when it comes to managing this pot of cash,' says Ms Tay. Citi favours equities in Asia and emerging markets, although it is cautious due to the the recent sharp run-up in prices.
At Deutsche Bank, exposure to equities and credits has been nudged up since March. Christian Nolting, the bank's private wealth management regional head of portfolio management, says Deutsche has developed tools to help clients to hedge risks. One example is a customised swap to hedge volatility exposures.
Since the hedge was in place last year in one particular mandate, the fund has returned 1.3 per cent in roughly 12 months to March this year. In that time, European stock markets fell 39 per cent and comparable strategies declined 24 per cent.
Morgan Stanley's asset allocation for its balanced portfolios has reduced equity exposure from 50 per cent in January to 42 per cent now, in favour of fixed income and alternative investments.
Tan Su Shan, Morgan Stanley's head of wealth management for Asia, says: 'Most clients' risk appetite improved in Q2, although there are many sceptics on this sharp V-shaped rally. Asian clients have favoured liquid, transparent instruments. We remain overweight on bonds as we continue to find good value in some investment grade bonds with decent yields and decent credit ratings, especially in Asian names.'
Ms Tan says clients can tap several strategies to hedge risk, such as to invest in uncorrelated assets. Illiquid real estate, for instance, can be balanced with a liquid cash-like portfolio of short dated bonds.
'With the recent gap up in valuations, it may be a good idea to reduce leverage as the more expensive assets are, the more risky it is to take on too much debt,' says Ms Tan. 'There has been also a conscious effort now, especially with the recent market moves, to trim concentrated positions, or at least to either buy protective puts/write covered calls (that is, collar them into a protected position).'
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