Wealthy investors are exploring long-term strategies to reposition investment portfolios in anticipation of global rebalancing, according to the US Trust 2012 Investment Strategy Overview.
In the near term, US Trust advises high net worth investors to invest tactically yet defensively, capitalising on market stability to lower risk and reduce cyclical exposure with high-yield, cash flow-driven and dividend-based investment strategies. At the same time, US Trust says the wealthy should proactively position portfolios to take advantage of investment opportunities from global rebalancing, a cycle still in the early stages but likely to be the dominant driver of investment performance over the long term.
“Investors should be patient, take advantage of the volatility when good investments get thrown out with the bad, and look to buy high quality assets at attractive entry points that can improve portfolio yield and stability,” said Chris Hyzy, chief investment officer (CIO) of US Trust.
US Trust’s 2012 Market Outlook and Portfolio Adjustments: in its 2012 Investment Strategy Overview, US Trust says tactical adjustments can bring portfolios to a more risk-neutral balance over time and allow cash flow and yield-tilt strategies to be the primary driver of total return.
The US Trust outlook report expects a lingering dark cloud over fundamentals, with the S&P 500 Index producing only a slight uptick in profits in 2012. After a beginning of the year run up based on jobs and earnings optimism, the index could trade as low as 1150 around midyear and likely end 2012 in the range of 1300 to 1350.
Quality yield will be in short supply, so emphasis should be placed on equities over fixed income at current levels, given the yield advantage. US equities are expected to outperform most major developed market equities, including the eurozone and Japanese markets, while emerging market equities are expected to continue to offer attractive returns.
Fixed income investors should emphasise corporate bonds, particularly high yield, over US Treasuries. In the tax-exempt space, investors should favour high-quality municipal bonds, including essential-service revenue bonds and general obligation bonds of financially strong local governments.
While the long-term commodity bull market is expected to remain intact, commodities will be vulnerable in the near-term to the recession ‘winds’ blowing from Europe and a cyclical slowdown in China. US Trust recommends slightly lowering tactical allocation to commodities and shifting to cash while looking for re-entry points at attractive valuations. Long-term investors should consider actively managing commodity exposure using roll and long/short investment strategies as well as farm and timber assets for those who can accept some illiquidity.
Precious metals, led by gold and silver, will remain an effective hedge against rising risks, particularly from instability in the European financial system.
To help dampen portfolio volatility, high net worth investors should consider hedge fund investments in liquid securities that are run by managers with diversified strategies who understand the drivers of balance sheet repair around the world and who use leverage responsibly.
The value of residential real estate is expected to remain depressed in 2012, with more time needed to liquidate excess inventory before taking a small upturn beginning in 2013.
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