BOURSE SECURITIES LIMITED
January 22nd, 2018
What’s your investor type?
This week, we at Bourse discuss the three investor profiles – conservative, moderate and aggressive and offer some guidance for investors seeking to position their portfolios for the year ahead. Investors may fall within one of these three categories depending on their investment objective, risk tolerance, time horizon and liquidity needs. Our previous article titled ‘2018 International Market Outlook’ would have examined various regions and asset class performances in 2017 and the outlook for 2018. This week, we take a closer look at how the three investor categories would have performed.
Which Type of Investor are you?
The Conservative Investor
The Conservative investor values capital preservation over capital appreciation. This investor is comfortable accepting lower returns for a higher degree of stability and typically seek investments in low risk securities. This investment strategy is most suitable for investors who seek current income and stability and are less concerned about growth.
The Moderate Investor
The Moderate investor values reducing risks and enhancing returns equally. Their primary objective is to earn relatively stable income and capital growth. As such, moderate investors are willing to accept modest risks to gain higher returns. This Investment strategy is most suitable for long-term investors who do not need current income and want some growth potential.
The Aggressive Investor
The Aggressive investor is focused on wealth maximization through higher risk- return exposure. Capital appreciation is the primary investment objective rather than preservation of income or capital. As such, their portfolio allocation would be heavily weighted in stocks rather than fixed income and cash. This investment strategy is most suitable for investors with a high risk tolerance and are financially positioned to withstand market fluctuations.
Finding the Right Portfolio Mix
The Conservative Investor
One of the main objectives of the conservative investor is income generation. Such an investor’s portfolio might contain around 55% of fixed income instruments, as these securities typically provide a fixed stream of income. USD fixed income instruments (45%) are favoured when compared to TTD fixed income instruments (10%), as the domestic interest rate outlook remains uncertain. Factors such as higher government borrowing and a potential credit rating downgrade may push interest rates higher, while persistent excess liquidity may lower yields. Rising inflation may also be a disincentive for TTD fixed income investors, given its ability to erode investors’ real returns.
It should be noted, however, that the prices of USD fixed income instruments, particularly those of emerging market bonds, have been on an upward trajectory, driven by a search for yield by investors and improving macroeconomic indicators in emerging economies. For example, USD emerging market bonds returned 9.88% and 8.17% in 2016 and 2017 respectively. While this would have benefitted investors with a higher allocation to USD fixed income instruments, looming interest rate increases by the US Federal Reserve and other event driven risks could impact this asset class going forward.
Given the investor’s emphasis on capital preservation, money market funds and cash might also carry a significant weight in the portfolio allocation, at 25% and 5% respectively. The conservative investor’s low risk tolerance also warrants a smaller allocation to riskier assets such as equities, which represent 15% of the portfolio.
The Moderate Investor
Similar to the conservative investor, the moderate investor also seeks income generating securities. Fixed income instruments, including USD fixed income securities and TTD fixed income securities, might represent 40% and 10% of the portfolio respectively. Roughly 5% of the portfolio could held in cash and 10% placed into money market funds.
When compared to the conservative investor, the moderate investor has a reasonably higher risk appetite and a desire for capital appreciation. Accordingly, a larger portion of the moderate portfolio might be allocated to stocks, including regional equities (20%), emerging market equities (10%) and US equities (15%).
The Aggressive Investor
The Aggressive portfolio places a higher focus on riskier assets, in search of higher returns. Accordingly, a target asset allocation for the aggressive portfolio might include 10% in TTD fixed income, 20% in USD fixed income and the remaining 70% in equities.
With a significant allocation to equities, this type of investor should note that valuations (as measured by the price to earnings ratio) are at its highest in four years. Improving global economic growth have started filtering into corporate earnings growth. As such, valuations – an indication of investor sentiment – have been on an upward trend over the last four years. For example, investors in the U.S. paid 22.4 times for every dollar of earnings in 2017 as compared to 18.3 times in 2014. It would appear that, even with improved economic conditions, the increase in stock prices have advanced at a faster pace than earnings increases.
Portfolio Returns
The lowest returns were earned by the conservative investor over the period 2014 to 2017. The portfolio provided an average total return of 3.5% over the period due to the conservative investor’s emphasis to preserve capital. The average annual returns for the moderate and aggressive investor portfolios were relatively higher at 4.1% and 4.2% respectively. Portfolios with a higher allocation to equities would have outperformed in 2017 owing to the stellar performance of the equity market, as corporate earnings and investor sentiment continue to improve. Consequently, the aggressive portfolio provided the highest returns of 12.7% for FY2017, followed by the moderate portfolio (10.3%) and the conservative portfolio (6.9%).
Investor Considerations
Having explored how the various portfolios have performed, there are several themes investors should keep in mind when constructing a portfolio. These include:
- Access to US dollars
In the current local economic environment, access to US dollars remains a constraint. Although the energy sector is expected to rebound in 2018, there may be a time lag until this improvement filters throughout the economy, in order to alleviate the foreign exchange shortage. As such, it is vital that those with USD make the best use of their holdings by investing in the portfolio that meets their investment goals.
- Investment Experience
Investors with limited experience may be find it difficult to construct and manage a portfolio. As such, it may be best to consider a mutual fund. These funds offer investors the benefit of professional management and diversification, by investing across various asset classes and regions. Additionally, mutual funds usually require a low initial investment. Investors are also able to redeem their funds for liquidity purposes in a relatively short time.
For the detailed report and access to our previous articles, please visit our website at: http://www.remotestores.com
For more information on these and other investment themes, please contact Bourse Securities Limited, at 226-8773 or email us at invest@boursefinancial.com.
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