Balentine’s approach to investment management is a “risk-first” approach that some may see as defensive, contrarian and even sometimes counter-intuitive. But it is built specifically for periods like this: when markets have given up entire yearly gains in a matter of days. Our considerable investments in assets outside of the United States and our emphasis on hedge strategies, commodities and market-neutral investments means that our clients’ portfolios are better positioned to weather the storm.
In November 2010, the Federal Reserve (Fed) announced a second round of quantitative easing (QE2), a plan to buy $600 billion worth of bonds with newly created money to help the still struggling economy. Acting as a sequel to the initial $1.7 trillion used for quantitative easing in 2009 and early 2010, $600 billion was a bold number with two specific goals: to cap long-term interest rates and bolster bond prices. The results have been mixed.
If you’re lucky enough to win the Powerball lottery, you will have to decide if you’ll collect the prize money in one lump sum or in uniform payments over time. You have to choose between a smaller guaranteed payout and a potentially larger, but less certain, outcome. Many pension fund managers face a similar quandary when assessing how to invest portfolio assets: accept certain payoffs in the future for known costs today, or risk a potential shortfall tomorrow for less cost today.
Volatility, both experienced and expected, is but one consideration when evaluating an investment decision. Traditional investment advisors have tended to build portfolios around the potential returns available from asset classes. This approach overlooks the risk side of the equation. At Balentine we have categorized investments by a multitude of risk factors, liquidity, active vs. passive, and income potential; this is the building block approach to portfolio design. The idea is to establish the risk parameters first and then construct a set of investments that provide the greatest reward for the risks borne.
Adrian Cronje, Balentine’s Chief Investment Officer, recently talked with Michelle Bova from FactSet about the failures of traditional asset management following the financial crisis of 2007.
Today, the US stock market is about 30% overvalued relative to the most reliable predictor of future long-term returns: the cyclically adjusted PE (price-to-earnings) ratio. It is prudent therefore to plan for a more subdued inflation-adjusted rate of return from stocks from January 2011’s starting point and to diversify your wealth into asset classes and strategies beyond stocks and bonds, even if it is likely that stocks are going to outperform bonds in a rising interest and inflation rate environment.
Risk is a component of almost every aspect of human life. In some situations, risks are relatively minor and have potentially little impact. In other, more serious situations, risk can pose dangers to life and livelihood.
One clear message from our 2011 Capital Market Forecasts, is that it’s going to be difficult to achieve annualized real rates of return in excess of 4% from a well diversified portfolio of traditional asset classes from today’s starting point. In other words, investors need to do more than simply buying and holding a traditional mix of stocks and bonds to bridge the gap between what is possible and what is required.
As the name implies, these are investments in global companies that demonstrate certain characteristics of quality. But what exactly is “quality?” And how is this different, or similar to, more traditional terms such as “growth” and “value” stocks?