Diversifying effectively in a divergent market

IN THIS diverging world with increased volatility, investing in the current market environment is increasingly challenging. In addition to geopolitical tensions and falling oil prices, 2014 also saw divergence in central bank policies. Predictions are that 2015 will continue to see uneven economic growth and varying approaches to government policymaking.

In such an uncertain economic environment, it is more crucial than ever for investors to recognise the importance of diversifying, rebalancing and managing risk to get an appropriate balance between risk and return on their portfolio in line with their long-term financial goals.

So what should investors be looking at in this divergent market?

Diversification is the key. We believe investors holding a well-diversified portfolio of equities, bonds, and alternatives, stand the best chance of navigating the diverging world successfully, with comparable low levels of volatility. In general, the US dollar and eurozone equities are noted to be strong while investment grade corporate bonds offer a yield pick-up. Investors should, however, still be cautious about strategic commodity positions, given the high price volatility. While we expect oil prices to recover in the second half of the year, the near term outlook remains uncertain.

Diversifying assets is not an easy task, given the growing complexities of today's marketplace. So how can investors be successful in attaining a well-balanced portfolio? One first needs to make sense of vast amounts of data, monitor thousands of financial instruments, build a well-diversified portfolio, supervise it constantly, and be able to react swiftly and effectively. This is not easy in today's rapidly changing environment.

A popular solution for investors remains the core-satellite approach - one that splits investments into two parts: a core portfolio of over 70 per cent tailored to their long term needs, combined with satellite investments of less than 30 per cent that allows them to take advantage of market opportunities. With this core-satellite approach, the challenge is getting the optimal mix of investments. This is not easy as it would require investors to constantly monitor markets and understand the implications of market movements. Investors are, thus, choosing to outsource and automate core portfolio investments via investment mandates, which delegates the analysis and day-to-day investment decisions to a financial partner.

An added advantage of investment mandates is that it helps investors to overcome "home bias", the common disposition of investors to stick to their home markets, most usually in stocks which they are familiar with. Investment mandates also help to take the emotion out of investing, reducing performance volatility in the long term.

It is important, however, that investment mandates need to be shaped by market insights based on extensive analysis, research, instrument selection and risk management. One such tool is the UBS House View, an integrated and systematic process that brings together the global research and insights of a network of 900 analysts, economists and strategists with a strong local presence in each market, in consultation with external fund houses, and screens 60,000 investment vehicles on an ongoing basis.

In this uncertain economic environment, investors need to have a partner that has eyes and ears on the ground to help them tweak their portfolio. This helps investors to diversity effectively, protecting and growing their wealth in the long run.

With increased risks come increased opportunities, and investors can rely on strong financial partners to seize investment opportunities that lie ahead in 2015.