A tested framework for portfolio investing

VOLATILITY is an inevitable feature of investing. While it often unsettles markets in the short term, it can also create opportunities for investors willing to look beyond the immediate headlines.

Markets react to economic data, policy decisions and geopolitical developments in the near term, but investment returns over time are driven by deeper movements that reshape industries and economies.

Investors who can identify these shifts early, while building portfolios that can withstand inevitable bouts of volatility, are better placed to capture the opportunities they create.

That makes portfolio construction just as important as stock selection.

Our investment approach combines growth equities with income-generating and alternative assets, balancing participation in long-term growth with resilience across market cycles.

We have followed this approach for the past seven years through the Covid-19 pandemic, the sharp interest-rate tightening cycle in 2022, volatility related to “Liberation Day” and the US-Iran conflict.

Over that period, the strategy returned a net 78.6 per cent, or 9 per cent annualised, outperforming the average return of more than 900 mutual funds in the Morningstar universe by 33 percentage points.

While no investment approach outperforms in every market environment, periods such as these underscore the importance of staying invested with a disciplined framework, rather than reacting to every bout of market volatility.

To help identify businesses with enduring growth potential, we introduced the “I.D.E.A.” framework in 2020.

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It groups companies into four broad categories:

• The Innovators, which develop new technologies;
• The Disruptors, which reshape industries;
• The Enablers, which provide the infrastructure and tools that make transformation possible; and
• The Adapters, which are established businesses that successfully incorporate new technologies into their operations.

Our framework focuses less on countries and more on the characteristics that enable companies to create value over time.

Businesses that innovate, enable change or adapt ahead of competitors are generally better placed to sustain growth through different market cycles.

Ecosystem involving AI companies

Artificial intelligence illustrates this well.

What began as an investment case centred on advanced semiconductors has since broadened into a much larger ecosystem.

As AI adoption accelerates, the demand for computing power continues to drive investment in data centres, networking infrastructure and specialised hardware, creating opportunities well beyond the companies developing frontier AI models.

Looking only at the largest AI companies risks missing much of the opportunity.

Businesses supplying the infrastructure that enables AI – from parts of the semiconductor ecosystem to specialised hardware providers – may prove just as important over time.

They may receive less attention than the headline names, but they are indispensable to the broader AI ecosystem.

The same lens can be applied beyond AI.

Rising electricity demand, energy security considerations and years of underinvestment are supporting a new cycle of capital expenditure in parts of the energy value chain.

At the same time, advances in AI are accelerating innovation in healthcare and longevity, creating opportunities in areas such as drug discovery and precision medicine.

What links these themes is not technology for its own sake, but businesses with enduring competitive advantages, resilient earnings and exposure to powerful, multi-year trends.

These characteristics have historically distinguished companies capable of compounding earnings and shareholder value over many years.

Growth, however, is only one side of the equation. Even the strongest businesses experience periods of sharp price swings, and portfolios built solely around growth assets can become vulnerable when markets turn.

Investors therefore need sources of stability alongside long-term growth, particularly in an environment where uncertainty has become a recurring feature of markets.

Balancing the barbell

This is where the other side of the barbell becomes important.

In fixed income, we maintain a preference for investment-grade bonds, and focus on issuers with strong fundamentals and a demonstrated ability to meet their obligations.

If inflation remains elevated and bond yields remain skewed upwards, selectivity becomes increasingly important. We continue to favour quality over the pursuit of incremental yield.

Within corporate credit, we maintain a preference for a five to seven-year duration. In emerging markets, we focus on economies that demonstrate energy independence, policy credibility and adequate risk compensation.

Alternative investments also play a significant role. Despite medium-term headwinds, we continue to see a constructive case for gold, supported by factors including de-dollarisation and monetary debasement.

Hedge funds can serve as portfolio stabilisers, particularly during periods when the traditional diversification benefits between stocks and bonds become less reliable, and existential risks to business models are abound.

In private markets, widening dispersion reinforces the importance of selecting high-quality managers and resilient assets.

The purpose of these allocations is not to chase returns.

Their role is to provide stability and balance, allowing investors to maintain exposure to long-term growth opportunities, without becoming overexposed to short-term market swings.

Reining in impulses

Equally important is investor behaviour.

One of the greatest challenges facing investors is not market volatility itself, but the tendency to react to it.

In periods of market stress, investors tend to exit positions, only to find themselves reluctant to re-enter when markets recover.

Anchoring to previous exit prices often prevents participation in subsequent gains, even when the underlying fundamentals remain intact.

This is why investing for the long game requires more than identifying the right opportunities.

It requires a portfolio structure that can withstand periods of uncertainty and help investors avoid behavioural pitfalls that undermine long-term returns.

The most successful investors are rarely those who make the best short-term predictions.

More often, they are those who maintain conviction in a sound investment framework and remain committed to it through changing market conditions.

Markets will remain uncertain. Structural change will not.

The challenge for investors is to identify the businesses driving that change, and stay the course long enough for its value to be realised.

The writer is chief investment officer, DBS Bank