Focus on Investing Fundamentals
The Current Market Turmoil Means Getting Back to the Basics
Mar 1, 2009
With an unabashed bull market it’s easy for many investors to abandon their fundamental goals and objectives. The last year has left those same investors wondering what happened with their portfolio in tatters. Many have headed for the exit, vowing never to return. It’s time to refocus on the asset allocation that fits your basic investment objectives.
Mix & Match Your Asset Allocation
First, consider the various asset classes one might consider. Please remember that not everything is suitable for everyone. Each asset has its own risks and potential rewards so one should seek out professional advice before investing.
A) Domestic equities
B) International equities
C) Emerging market equities
D) Domestic fixed-income
E) International fixed-income
F) Real estate
G) Hedge funds
H) Private equity
I) Commodities
J) Other alternative asset classes
This list is by no means all inclusive but it does seem somewhat daunting. In this economic environment, which asset classes would fit not only your investment objectives but your personality as well? In other words, how much market, credit, currency and basis risk is any investor willing to assume to reach their investment objective? Does size does not fit all.
Institutional Investors are Moving from Passive to Active Managers
Research from the consulting firm, Greenwich Associates, would indicate that taken in aggregate, institutional investors are decreasing their exposure from passive domestic equity managers to active managers. The idea behind this move is that active managers can generate a certain amount of "alpha," i.e., additional, incremental income.
Allocations to Bonds and Stocks
Allocations to domestic fixed-income have been pared back a tad but again, moved to active managers at the expense of passive. The overriding reason for this is due to the widening credit spreads over sovereign debt and that active managers can add a certain amount of value. Institutional investors' exposure to international equities and fixed-income have been reduced slightly as well, while commitments to emerging markets have seen more drastic reductions.
Allocatons to Alternative Asset Classes
Asset classes that have seen increases in allocations are "alternative" in nature, such as hedge funds and funds-of-funds, private equity and real estate. Again, these investors are looking for "alpha" or incremental returns on top of what might be expected, reductions in "beta" or volatility and very importantly, non-correlated returns relative to a benchmark or broad market index.
The Bottom Line - Get Back to Basics
Please keep in mind that just because someone else does something does not mean you should. Most institutional investors have resources most individual investors do not. At the end of the day, an investor should focus on what the reasons are behind the investment and that the investor is comfortable with the portfolio.
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