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.

The value of investments can fall as well as rise, and you may get back less than you invested. Past performance is no guarantee of future results
IG Smart Portfolio 2017 review

Without a doubt we are in one of the greatest bull markets in living history. At the tail end of 2017, the US and UK equity indices hit record highs, with further gains in early January 2018.

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:

Source: IG, Bloomberg, January 2018

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.

Current Positioning

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:

Source: IG, Bloomberg, January 2018

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.

Get your free beginner's guide to investing

●  Discover the benefits of investing your money

●  Learn about the different investment options available and how to get started

●  Understand how to build a diversified portfolio and manage your risk

Form has failed to submit. Please contact IG directly.

  • I’d like to receive information from IG Group companies about trading ideas and their products and services via email.

Get my guide

For more info on how we might use your data, see our privacy notice and access policy and privacy webpage.

Form has failed to submit. Please contact IG directly.

  • I’d like to receive information from IG Group companies about trading ideas and their products and services via email.

Get my guide

For more info on how we might use your data, see our privacy notice and access policy and privacy webpage.

●  Discover the benefits of investing your money

●  Learn about the different investment options available and how to get started

●  Understand how to build a diversified portfolio and manage your risk

Get your free beginner's guide to investing

This information has been prepared by IG, a trading name of IG Markets Limited. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients. See full non-independent research disclaimer and quarterly summary.