Managing market volatility: how can private investors mitigate risk and take advantage of opportunities to strengthen portfolios?
30 November 2016
Private investors looking to navigate the more volatile market environment have a range of tools and techniques at their disposal to mitigate risk and even take advantage of the uncertain economic climate, says Connection Capital, the specialist private client investment business.
Connection Capital highlights several approaches investors could consider to ensure portfolios are well-balanced and resilient, for example:
- Balance short- and longer-term strategies in a diversified portfolio
Diversification is not simply about having a large number of investments in a portfolio. Investors need to diversify the risks to which they are exposed in order to avoid excessive concentration building in one particular area. Investors should also consider holding investments with a range of time-frames.
For instance, including some longer-term, less liquid investments such as private equity could reduce the risk of over-reliance on more volatile shorter term investments in liquid markets like quoted equities. Yield-driven investments, such as those where investors receive returns from loan coupons, could be another suitable alternative to diversify sources of returns, as these may not be directly impacted by market movements.
- Identify uncorrelated assets
Investors could benefit from including uncorrelated assets in their portfolios to help reduce the short-term impact of volatility in public markets. These are assets whose change in value neither affects, nor is affected by, the value of the other assets in a portfolio, and whose value may not be driven by changes in more mainstream investment classes such as equity or bond markets. These types of assets may still be able to generate positive returns irrespective of the broader market environment and economic picture.
Examples of niche or uncorrelated assets might include Third Party Litigation funds, where a third party provides the funding to assist a claimant with expensive litigation in return for an agreed share of the proceeds of any successful claim. Returns come from the outcome of cases resolved by the courts, and are therefore not influenced by movements in traditional asset classes.
Investors should be wary of overpaying for assets, even in areas where strong demand is pushing prices up. Thinking about how funds or individual assets might perform over the whole market cycle and making sure they are comfortable with the level of potential risk in times of stress, such as rising interest rates or economic or regulatory changes, is vital. Maintaining this disciplined approach in positive markets should help to ensure that investments remain resilient when conditions deteriorate.
Emma Bewley, Head of Fund Investment at Connection Capital says:
“As conditions become more challenging, private investors need to ensure they know where the risks in their portfolio lie. Reviewing their existing portfolio composition in the context of their longer-term investment goals is key. Establishing whether it meets their requirements in terms of asset exposure, investment time frame and diversification is essential groundwork to inform decision-making around asset allocation from here on.”
Claire Madden, Managing Partner at Connection Capital adds:
“The barriers private investors have faced in the past in gaining entry to some of these kinds of hard-to-access opportunities are coming down, as innovative investment platforms and models come onto the market making them more widely available.”
For example, although most alternative asset funds or direct private equity deals are normally only available to institutional investors, Connection Capital enables private investors to access such opportunities by acting as an institutional investor on clients’ behalf.
Run by private equity and fund management professionals, Connection Capital has a well-connected industry network and impressive track record, enabling it to source attractive deals. It uses capital aggregated from multiple private investor clients who have chosen to participate in each specific opportunity from among the range it offers.