Date
21 October 2017
A mixed investment style may benefit those who wish to gain from risk taking but also need steady returns. Photo: Bloomberg
A mixed investment style may benefit those who wish to gain from risk taking but also need steady returns. Photo: Bloomberg

Bigger risks bring higher returns

My clients and I all agree that this year will be full of uncertainties.

The market will be more volatile, and investors should get their portfolios ready for the challenges ahead.

A senior investor once told me some types of stocks have higher risks than the market average.

While the value-type stocks and small caps carry a long-term risk premium and potentially higher returns, some risker-than-average stocks cannot offer any extra return.

So we should select carefully.

How? Different investors have different answers. Some find the answer in macroeconomic cycles, while some engage in fundamental analysis.

Many factors, like the stocks’ sensitivity to interest rates, economic growth and valuation level, affect returns from equity investment.

Buying stocks with low price-to-equity (PE) ratio and selling those with high PE will help the portfolio outperform the market in the long term.

But picking stocks based on their sensitivity to interest rates may not be attractive in long run.

The market is cyclical. Regardless of the investment strategy, one should always be prepared for the risks involved.

I met a team of investors who use systematic analysis to construct their portfolio.

They combine different investment styles to make a diversified portfolio with one principle — the bigger the risk they take, the higher the return they expect in the long run.

So they can identify the risky factors that are likely to provide real extra returns through systematic analysis.

With such a diversified portfolio based on mixed investment styles, the team can overweight some risky stocks in their basket to offset the cyclical fluctuations of other stocks.

They also adjust the respective weight of stocks of each investment style in the portfolio to increase the stability of the portfolio returns and reduce the impact of different market environments or economic cycles.

For those who wish to gain from risk taking but also need steady returns, they may find a mixed investment style a good strategy.

This article appeared in the Hong Kong Economic Journal on March 4.

Translation by Myssie You

[Chinese version中文版]

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MY/JP/CG

Director, International business, Asia Pacific, Alliaz Global Investors

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