IG Smart Portfolios: 2017 investment review and current positioning
In times of easy stock market returns, investors can be lulled into making unwise investment decisions. Portfolio Manager, Oliver Smith, explains how IG Smart Portfolios can make a strong core for your investments.
A sweet cocktail of continuing economic growth, low unemployment, high levels of company profitability and latterly optimism surrounding Donald Trump’s tax cuts are all contributing to a golden period for investors. Indeed an extended economic cycle that has confounded the sceptics may have many years to go if inflation can be kept under control (see our 2018 outlook).
At times like this it can become tempting to throw caution to the wind and pile into the asset class that has gone up the most, with the expectation that there will be someone else out there to buy your investment off you at a higher price, at a later date.
Warren Buffet famously wrote about just this, in his year 2000 Chairman’s Letter, saying:
'Nothing sedates rationality like large doses of effortless money. After a heady experience of that kind, normally sensible people drift into behavior akin to that of Cinderella at the ball. They know that overstaying the festivities — that is, continuing to speculate in companies that have gigantic valuations relative to the cash they are likely to generate in the future — will eventually bring on pumpkins and mice. But they nevertheless hate to miss a single minute of what is one "helluva" party. Therefore, the giddy participants all plan to leave just seconds before midnight. There’s a problem, though: they are dancing in a room in which the clocks have no hands.'
It’s fair to say that many cryptocurrency investors, and indeed the $400 million buyer of Leonardo da Vinci’s Salvator Mundi, could be sitting in this uneasy camp.
IG Smart Portfolios
IG Smart Portfolios are not designed to pick the world’s best performing asset class, and to run with it. What they are designed to do, is to offer investors a blended exposure to a range of asset classes with a goal of getting the highest possible return for an amount of risk that you are comfortable to take.
Looking at the asset class returns for 2017 in chart 1, we can illustrate how this has worked in practice:
The chart shows the trade off between risk and return. Emerging markets, and equities in general, enjoyed the largest returns, but with the highest risk. Conversely short—dated bonds, such as UK Gilts and GBP Corporate debt, which have lower volatility, had much more modest returns.
Owners of more risk—seeking IG Smart Portfolios have much higher allocations to equities (green dots), while more conservative investors have larger allocations to bonds (blue dots). In 2017 those who sought risk were rewarded with attractive returns, but when sentiment finally turns and markets correct, they also face the prospect of having to shoulder larger short—term losses than our more risk—aware clients.
There will be times ahead when our portfolios fall in value, but diversification through a range of global investments (alongside continuous monitoring and taking advantage of new opportunities, when they arise) should mean that your journey through the market cycle is much more comfortable than it might be otherwise.
Should you wish to do so, our share dealing platform offers a low—cost way to trade your best ideas, while an IG Smart Portfolio shepherd’s your wealth for the longer term.
IG Smart Portfolios are currently positioned quite cautiously in bonds, with BlackRock forecasting that yields could rise, leading to a more attractive entry point at a later date. Similarly there is also scope to raise equity allocations when the opportunity comes around.
A key differentiator of the portfolios, and common theme running through them is currency hedging; something that the majority of investors don’t do due to its complexity.
GBP hedged exposures serve two purposes; they protect your investments from the translation effects of a strengthening pound, and by removing that currency exposure we can also smooth your investment returns.
In chart 2 we can see how this works in practice:
In 2017, US equities returned 21.8% in dollars, but just 11.2% in sterling terms as the pound appreciated against the dollar. IG Smart Portfolios had exposure to the iShares S&P 500 GBP Hedged (IGUS) exchange traded fund (ETF). This protected the portfolio from dollar weakness, but also had the additional bonus of lowering the volatility of client returns as can be seen in the graph, where the hedged returns are all to the left of the unhedged equivalents.
Even where the GBP hedging did not add any visible monetary gain, such as in 'Europe ex UK', there were still outsized benefits for the portfolio in terms of risk reduction.
At the end of March we will have a full year’s performance history to offer to investors, and we look forward to updating you then.