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Dynamic approach meets demand for absolute returns

Allan Nam

Asian investors are looking at absolute returns rather than relative returns from their investment portfolios, according to private bankers.

Traditionally, investment performance is measured against a benchmark index, typically one of the Morgan Stanley Capital International (MSCI) indices. Gauging performance in this way means an investment portfolio would be considered successful as long as it was beating its benchmark index.

However, since the 2000 market crash, Asian investors have been taking less comfort from relative performance and looking more for cold, hard returns.

Clement Hui, head of investment advisory at Credit Suisse's north Asia private banking unit, said investors had every right to see investment this way.

'Some investors have always looked for absolute returns and that's what investment should be about. You invest to preserve your capital or grow your capital. Why should you invest to lose money, even if you are outperforming on a relative basis?'

Mr Hui said demand for absolute returns required private bankers to look at portfolio management in a more dynamic way.

'If you go by the conventional approach, you basically either increase your cash if you don't like the market, or you can underweight, which also means increasing your cash, because you cannot go short. But the cash yield is so low right now, where would we be adding value for our clients?

'By enlarging the universe of investment products, however, we have more flexibility. Instead of saying I don't like the bond market and I don't like the equities market so I have to increase the cash allocation, we can retain or slightly reduce our equities position and go into hedge funds, go short, or involve options or warrants.

'We still have weightings, but we make use of hedge funds to give us the additional returns and the hedge just in case our view is wrong. And also, by enlarging our universe, we increase our flexibility. For example, last year, gold did very well, and the euro did very well. Now if we had exposure through hedge funds to these areas, then we would benefit. Whereas in conventional asset allocation, it is a bit difficult to capture that.'

Mr Hui said the evolving approach to investment portfolio management had been driven by 'changes in the market', including greater market volatility and 45-year low interest rates.

The market crash highlighted the importance of taking profit.

'Before the crash in March 2000, some people were sitting on stocks and riding the rally all the way up. At one point, they had 50 to 60 per cent gains on paper. When the market went all the way back down, they lost all their paper gains and some of their capital investment as well. So we advocate taking profit based on fundamental analysis when an investment reaches fair value to protect the gain, and then go into alternative investment again to protect the principal and hedge against market volatility.'

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