You’ll have to diversify to survive 2011

SELL-SIDE strategists have been exuding optimism in recent days. The vast majority are expecting an upbeat 2011 where equities – both developed and emerging – continue to make gains.

Yet for the wealth management industry, which is there to help clients grow and preserve their wealth, it is more difficult to be quite so bullish and certain about the coming year.

Chief executive of Hassium Asset Management Yogesh Dewan says: “Things are improving but slowly. We are cautious but not pessimistic; we have slowly been increasing our allocation to risky assets.”

And there are reasons to be positive. Valuations appear reasonable and third-quarter corporate earnings revealed good top line numbers and guidance. But that does not mean investors should not be worried. The fragility of the US consumer, sovereign debt issues, bubbles in China and currency wars will all be headwinds.

Dewan observes that your equity exposure and your dollar exposure account for around 70 per cent of your performance. These two factors are the most important decisions to get right for any investor but also some of the most complex.

So what will be the dominant themes for high net worth investors next year, according to wealth managers? Bill O’Neill, chief investment officer for Merrill Lynch Wealth Management, points to three issues: the need to maintain a well diversified portfolio, the hunt for yield in a low rate environment and inflation protection. While deflation is more of an issue across most of the developed world, O’Neill says there is the potential for inflation to surprise and investors need to think about how they can hedge against it.

He thinks “money will continue to gravitate to the pools of reliable growth like it did in 2010,” although he warns that prices are slightly different now compared to this time last year. He also warns investors must be careful of bubbles and avoid the lure of the crowded trade.

He also advises that investors should diversify sources of income with a focus on emerging market and UK commercial real estate as well as areas such as oil and telecoms that offer yield. Dividends are expected to remain a key part of any portfolio, especially when you consider that they have accounted for about 60 per cent of the returns from equities over the past 100 years, says O’ Neill.

With tight credit and ongoing uncertainty, companies with strong balance sheets, excess operational cash flow and expectations of increasing dividends will be favoured, says Simon James, founding partner of Gore Browne Investment Management.

2011 is not expected to be too different to 2010 and the markets are still likely to be difficult to navigate and prone to volatility. Wealth preservation will still be the order of the day in the “new normal” environment.