Does your money manager have an asset class bias?

At a recent institutional investment conference, several money manager panelists were asked whether they were still finding buying opportunities in their asset class, given the long and significant run-up in prices.

Every one of them responded enthusiastically yes.

Was this a case of a savvy money manager able to find pockets of hidden value in an otherwise expensive market?

Or, was it a case of what’s known in the industry as “talking your book” – the conscious or sub-conscious tendency of a money manager or investment advisor to talk up the benefits of their portfolio holdings or asset class?

This bias is something that we, as investors, are always mindful of when evaluating manager viewpoints. It can’t be helped really. If you only have one or two tools in your tool box, those are the ones you’ll use — for every job, in every environment.

It is also why we are passionately “asset class agnostic.”  Our whole ethos is around trying to eliminate bias from our investment decisions. Our Investment Committee will go anywhere to reduce risk and find value. For example, following the U.S. housing market collapse in 2008/2009, we took advantage of the sell-off to build a portfolio of 25+ U.S. garden-style apartment buildings. In 2015/2016, we entered the preferred share market for the first time, after prices had dropped to the point where valuations were highly compelling.

Fast forward to today and, quite frankly, we’re cautious about the high valuations we see in most asset classes, as are many of the investors we meet. (Read our earlier post The search for investment bargains in 2017.) Buying opportunities aren’t as plentiful, or as obvious.

We’re often asked, “so what am I to do if I’m a risk-averse investor who wants income and some growth from their investments?” Well, this is exactly our goal too and here’s our take:

1. Eliminate asset class bias. In this frothy environment, you really need to be creative to find value and impartial in your asset class selection to protect capital.
2. Reduce equity weightings. Currently, we’re at the lower level of our target ranges for equities. This allows us to participate in some upside should the market continue to rise, while offering downside protection in the event of a correction.
3. Reduce investment grade bond weightings. At such low current yields, bonds don’t provide much income and are arguably at peak valuation. Accordingly, we’ve reduced our weightings in bonds to the lowest level in our history.
4. Maintain higher levels of cash. With some of the proceeds from reduced stock and bond exposure, we are keeping higher cash levels. We will be patient for an opportunity to buy back in at lower valuations – and we’re fully prepared to give up some upside should the market continue to climb.
5. Add private alternative investments, selectively. With the rest of the proceeds, we have been making highly-selective, single-project investments — in seniors’ housing for example. Bricks and mortar investments that provide income and capital appreciation and don’t have market exposure. We are also building a portfolio of private debt investments – which offer higher yields than traditional fixed income. In fairness, these are hard-to-access investments not available through most money managers. In our view, alternative asset classes should represent no more than 10-20% of a client’s portfolio and we would caution about becoming over-weighted in alternatives.

The current investment environment is full of complacency and optimism. It is times like these when caution and patience are often rewarded. In our view, you need to keep your eyes squarely on risk management, and look for opportunities when markets present them.

Want to read more about how we build diversified portfolios? Check out our investment management approach.