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Invest like the high-net-worth to pandemic-proof your portfolio

Jonathen Chan
— 1 minute read

The impact of COVID has undeniably demanded attention, as it has kickstarted a new economic cycle and heralded in a bear market and global recession.

Jonathen Chan

At Citi, our wealth management business works primarily with high-net-worth clients with a global outlook. This means our clients are attuned to world events, and seek defensive portfolio allocations that focus on wealth preservation.

This prepares them well for periods of volatility, even unpredictable volatility like COVID-19. Everyone can take a leaf from this book, as uncertainty is on the cards for the foreseeable future. 

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Three lessons you can learn from the HNW investor playbook are:

1. Don’t try and time the market. 

During COVID, stock markets declined 30-35 per cent+ in March this year, but rallied 25-30 per cent in April-May as expectations COVID restrictions would end sooner than expected. Second wave fears and a realisation that recovery would take time saw markets pummeled again in June, ending the month ~3 per cent lower.

The roller-coaster ride has left the S&P 500 down 3.24 per cent since the start of the year, while the ASX 200 is down 9.74 per cent As of July 1. The Dow declined 36.65 per cent in February to March, and rallied 31.65 per cent in April to May. Year-to-date, it is still down 9.5 per cent. 

For investors that try and time the market, COVID-19 has been and continues to be a wild and sometimes scary ride. However, for long-term investors with an asset mix that allows for absorption of volatility, there has been greater scope to watch events from a more detached view.

High-net-worth investors tend to take a more cautious approach, as a key part of their portfolio planning is to protect their wealth. Instead of chasing high returns but high-risk opportunities, investments to them is about steadily growing their portfolio and limiting the downside.

2. Diversification is the only free lunch

In the wealth management industry we have a saying, “diversification is the only free lunch”. This saying has certainly proved true while navigating the impacts of the pandemic.

Australians traditionally have concentrated our investments in property, shares and cash. The first two suffer in downturns, and the latter is certainly not king in the current low-interest environment. This means more asset classes need to be considered, particularly in times of volatility – something high-net-worth investors have taken on board.

For example, Citi’s bonds transaction volume in January-February 2020 increased by about 90 per cent compared to the same period in the previous year. Clients wanted to take a defensive chance, and were risk-averse, opting not to chase further upside.   

There were also increased volumes into term deposits amount up 16 per cent, quarter-on-quarter. For those still wanting limited exposure to equities, structured investments also gained greater interest, with investment volumes this year up more than 240 per cent compared to January-February 2019. Through structured investments, clients can invest in equities with a hedge to partially offset risk. 

The outcome is these clients managed solid portfolio performance at a time when risk in equities was escalating. In comparison, certainly some investors would have made higher returns out of equities, but they would have been the minority. Most investors tend to wait for more gains as equities rally, and get caught in the panic selling when markets suddenly fall.

3. Learn about and use different asset classes

We have established that Australians are overweight to shares. However, as the year has unfolded, it has become clear the benefits of holding shares is diminishing. Apart from the difficultly of forecasting market direction, dividends have been slashed and profit outlooks are on a downward trajectory, indicating dividend payouts may deteriorate further. 

Bank dividend cuts have particularly hurt Australians, as traditionally many investors used reliable bank dividends as the income side of their portfolio. A significant portion of superannuation is also heavily invested in the big four banks. 

This is another impetus to consider other asset classes outside of shares, property and cash that are readily available, like term deposits, corporate bonds, and managed funds – to name just a few. Investors should remember to not just dismiss an investment type because the returns seem lower than other asset classes – it’s about balance and risk.

One trend for high-net-worth clients during this crisis has been to diversify through holding investments in multiple currencies. Citi’s global currency account, which lets clients hold different currencies, has seen volumes double since the start of this year. 

This is to take advantage of the benefits of safe-haven currencies like the US dollar and Japanese yen in times of high risk, and the strengthening of the Australian dollar as risk lowers, and through using an account like Citi’s, you can switch back and forth between currencies without all the transaction costs that used to be associated with such activities.

Despite the gyrations occurring in the share market, Australian’s will continue to be heavy investors in shares – it seems to be part of our DNA. That’s ok, but it remains important to learn how to balance a portfolio with other elements, so that when trouble hits the downside loss is manageable.

Jonathen Chan is an investment specialist at Citi Australia

 

Invest like the high-net-worth to pandemic-proof your portfolio
Jonathen Chan
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