Portfolio Construction for an Uncertain World

In a world increasingly shaped by economic uncertainty, persistent inflation, rising sovereign debt and geopolitical fragmentation, many investors are placing greater emphasis on preserving the wealth they have accumulated - not simply growing it.

For these clients, the question is increasingly:

“How do I protect the wealth I’ve spent my life building?”

To remain invested with confidence through changing market conditions, they need to know that their investment strategy is fit for purpose - aligned with their objectives, attitude to risk and investment time horizon - and supported by a well-constructed portfolio, designed to deliver the resilience they require.

Creating a Defensive Core and the Importance of Diversification

The use of the term ‘defensive’ can sometimes be misleading. It is not enough simply to hold assets that carry a low-risk label, as their underlying characteristics, sensitivities and relationship with the rest of the portfolio all need to be considered.

At the core of the Global Resilience Strategy is a range of diverse defensive assets - comprising defensive equities; short-duration bonds; and liquid alternative assets - deliberately broader than the traditional approach of relying exclusively on bonds.

Short-Duration Bonds

Fixed income from government and corporate bonds has traditionally played an important defensive role by helping to moderate equity-market volatility.

However, long-duration bonds can be sensitive to changes in interest rates, so short-duration bonds have been favoured, to provide income and defensive characteristics without exposing the portfolio to the same degree of duration risk.

And whilst corporate bonds can offer greater income than government bonds, during periods of severe market stress they can become more closely correlated with equities, as the markets reassess the financial strength of the underlying companies – creating correlation risk – so this has been taken into account also, with short duration government bonds favoured over corporate bonds.

Defensive Equities

The inclusion of defensive equities in the portfolio provides participation in the growth and profitability of companies whose revenues tend to be more resilient when economic conditions weaken. Businesses in areas such as utilities, healthcare, and consumer staples still carry equity-market risk, but demand for their products and services is generally less sensitive to the economic cycle.

Liquid Alternatives

Liquid alternatives are included to introduce sources of return that are less dependent on conventional equity and bond markets moving in a favourable direction. Their potential value lies in providing differentiated - and potentially less correlated - sources of return.

On occasions when inflation and rising interest rates place pressure on equities and bonds simultaneously therefore, carefully selected alternative assets can help reduce the portfolio’s reliance on the traditional relationship between those two asset classes.

In combination, this diverse mix of defensive equities, short-duration bonds and liquid alternatives creates a robust defensive foundation for the portfolio.

Exposure to Global Growth

A strategy designed for resilience should not be confused with one designed simply to minimise investment risk. Without sufficient exposure to productive companies and the wider global economy, the portfolio could struggle to outpace inflation, support future withdrawals, and meet the client’s longer-term financial objectives.

The Global Resilience Strategy portfolio therefore includes measured exposure to a globally diverse range of equites, benefitting from the long-term growth and profitability of productive and innovative businesses – but its smaller allocation in relation to the other assets held in the portfolio helps to ensure that the client is not exposed to more volatility and potential downside than their risk appetite dictates.

Cash – Liquidity and Flexibility

Cash is often regarded as the least interesting component of an investment portfolio, but that overlooks the valuable role it performs.

Within the Global Resilience Strategy, cash provides liquidity and a rebalancing buffer.

When market movements cause different assets to drift away from their intended allocations, available liquidity can help restore the portfolio’s target structure without requiring longer-term investments to be sold at an inconvenient time.

Where regular income is being withdrawn, a period of falling markets can create the risk that growth assets need to be sold after they have declined in value. Maintaining appropriate liquidity can help reduce that pressure and provide greater flexibility over when other investments are realised.

Cash is not included because it is expected to deliver a significant return, but because liquidity has strategic value within a portfolio.

Built for Resilience in an Uncertain World

The Global Resilience Strategy is a valuable addition to Forth Capital’s proven range of risk-rated investment strategies and illustrates the discipline at the heart of good portfolio construction; combining assets with the requisite characteristics, in the right proportions, to perform a defined role and meet the specific needs of the client.

If you are unsure whether your current portfolio and investment strategy remain aligned with your objectives, Forth Capital can provide you with a complimentary review.