Our Approach

Our Approach

See how our portfolios are developing for 2022. In this section we discuss our approach for strategic asset allocation, tactical asset allocation, fixed income, direct equities and alternatives.

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Strategic Asset Allocation

About SAA

 



Tactical Asset Allocation

About TAA

 



Expert views

Read Views

 

Strategic Asset Allocation
Looking to the past for what comes next: in today’s investment environment of relatively low expected returns, we have plenty of tools available for boosting portfolio performance.
Glancing in the rear view mirror

History shows that a well-diversified portfolio comprising multiple asset classes across different geographical regions can provide the best risk-adjusted returns over the long term. Such carefully constructed portfolios performed well throughout 2021’s recovery rally.


We design a range of strategic asset allocations (SAAs) to meet the objectives of different investors, and they provide a framework for our investment process. During 2021 these strategies, outperformed the returns one can realistically expect in any given year, except for the most conservative portfolios. What is more, they have done so with a smoother journey than should have been expected.

However, we shouldn’t expect a repeat of 2021 risk-adjusted returns on a regular basis. Past performance is no guide to the future.
Gazing through the spyglass

Looking ahead, lower returns than in the past few decades are a feature of the new investment environment investors face. These expectations are more dramatic for fixed income-heavy portfolios, but we also expect lower returns across all SAA risk profiles. They are not a result of how we construct our portfolios, but rather the result of low yields and high valuations.


What are the options for investors? We believe our well-diversified portfolios offer the best returns possible in this environment with a risk profile that matches your financial objectives. If investors are willing and able to ride the rollercoaster of higher volatility, a higher-risk strategy could be an option, but it’s not for everyone.

Short-term deviations from our SAAs through tactical asset allocation (TAA), carefully selecting sustainable investment instruments and efficient implementation are all ways to enhance SAA returns and are key features of our investment process.

Those with access to direct private investments and offshore hedge funds may also capture additional returns that often come from more illiquid assets.

A new normal for investors that’s not feeling so new anymore. Let’s tackle it together.
 

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Tactical Asset Allocation
Investment conditions remain healthy as the global economy enters the next phase of its recovery from the pandemic. While global stock markets can continue to rise higher, we believe Asian high-yield bonds have the potential to boost portfolio returns over the next year.
Short review 2021

Positioned for the recovery


The main investment themes of 2021 were the ongoing global equity rally, as company earnings recovered strongly from their Covid lows, and an increase in bond yields, as inflation reared its head.


The equity rally lost some steam in the second half of the year and local/idiosyncratic factors came to the fore, such as China’s regulatory clampdown across certain sectors, which weighed heavily on its stock market. We have had a neutral allocation to emerging market (EM) stocks since March. Our tactical allocation in 2021 benefited from an overweight to equities as well as a short-duration bias and overweight exposure to the US dollar. Meanwhile, the overweight on Asian high-yield (HY) bonds detracted significantly.
How we invest in 2022
We are maintaining our risk-on TAA view into 2022 by overweighting US equities as well as EM sovereign and Asian HY bonds over low-yielding sovereign and investment grade bonds.

While the early recovery phase of the cycle – with its outsized equity gains – is clearly behind us, we believe the cycle is not at its end. Equities are still likely to outperform bonds during this phase, and the US market offers superior domestic growth dynamics and an attractive mix of cyclicals, defensives and technology companies. We are also maintaining our preference for USD over EUR denominated bonds, due to the yield advantage (even after hedging the currency risk). In addition, USD bonds tend to hold their value better through periods of market volatility.
The appeal of Asian high-yield bonds
Asian HY bonds have come under increasing pressure in the second half of 2021. Unlike other global credit markets, Asian HY spreads widened to their highest level since the Covid crisis.

Investors priced in the risk of a default wave sweeping across the all-important Chinese property sector, which would mean more than a third of companies entering into bankruptcy. Such an outcome looks too dire to us, given the systemic risks it would pose to the Chinese economy. Corroborating our view, the Chinese government lately signalled an easing of certain restrictions, trying to calm investors’ anxieties and preventing further escalation. We are aware of the risks in the months ahead, but continue to believe the asset class offers a very attractive risk-return profile over the next 12 months. Thanks to its high carry of close to 10% and our expectation for spreads to tighten, we believe Asian HY will be an important positive contributor to 2022 tactical returns.
 

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Expert Views




Direct equities

Is company pricing power about to be put to the test?

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Kenneth Warnock,
Group Head of Direct Equities

Inflation has been largely subdued for the past 30 years, but has been spiking higher as the world recovers from the pandemic. How will company profits be affected if this inflationary environment persists? The answer is largely related to pricing power and working out which companies will be able to pass on increased costs to their customers – and which will not.

Warren Buffett, arguably the greatest investor of all time, famously said, “The single most important decision in evaluating a business is pricing power. If you’ve got the power to raise prices without losing business to a competitor, you’ve got a very good business. And if you have to have a prayer session before raising the price by 10 percent, then you’ve got a terrible business”.

Buffett should know. Alongside his business partner Charlie Munger, Buffett pivoted Berkshire Hathaway from Ben Graham-cigar-butt-style investing to quality growth investing in the 1970s and 1980s to combat the threat of rising inflation. Berkshire’s investments in high-quality business franchises like GEICO, Capital Cities, See’s Candies, Coca-Cola and Gillette gave it a portfolio of companies with products that customers regarded as non-discretionary. That factor allowed the companies to raise prices in response to rising costs without fear of losing business.

There is, perhaps, no better example of this than See’s Candies, the premium confectionery business acquired by Berkshire Hathaway in 1972. In his 2007 Letter to Shareholders, Buffett explained that See’s had achieved 7.5% annual growth in revenue since it was acquired, despite relatively modest growth of 1.9% in volume (weight of candy sold). The difference is price. Furthermore, as growth through pricing requires very little increase in invested capital, returns by 2007 were over 200%.

Looking at today’s market, which companies have the same characteristics? One way to gauge this is to evaluate switching costs. In other words, how easy is it for a customer to respond to a price increase by switching to another provider? If the answer is very difficult, then this company will likely have pricing power. If the answer is easy, then limited pricing power exists.

We ask this question before every equity investment we make. We think this approach will help our clients’ portfolios withstand the impact of rising inflation, if indeed this is something we are to experience in the years to come.
 

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Fixed income

With rising interest rates, what should investors expect from the credit markets?

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Lionel Balle,
Head of Fixed Income Strategy


We believe a combination of active management and a sustainable approach is the best way to invest in fixed income markets. With central banks beginning to move and the macroeconomic situation continuing to evolve, our view is one of differentiation, combining top-down analysis with our thorough bottom-up approach.

For me, there is a before and an after the 2008 Global Financial Crisis – investing in fixed income markets has been much more difficult since. Investors must understand the specific characteristics of bonds and the factors that influence their prices and performance. In today’s low-yielding environment, where central banks have started to think about tightening monetary policy, it is important to understand the impact of duration as well as what’s driving bond returns. With a huge part of the market trading on negative yields, it is tempting to ride the curve (by purchasing long-term bonds with a maturity date that could be longer than your investment time horizon) or invest in bonds with the highest yields. But both approaches come with risks.

I think it is critical for investors looking for opportunities to enhance yield in their portfolios to focus on risk in today’s market. Finding issuers with the best risk/return profiles is important to have conviction in the investment. It’s also important to incorporate environment, social and governance (ESG) factors in the investment process and to fully understand how they affect the issuer. If credit analysis gives us a good understanding of the health of a company, ESG factors help us detect tomorrow’s winners – businesses that can outperform over the long term. However, it is crucial to analyse the correlation between these convictions to build a well-diversified portfolio with an attractive risk/return profile.

Investing in fixed income is complex but also fascinating. The market’s performance reflects evolving macroeconomic conditions. Yet when you invest in a bond, you can have a reasonably accurate view of your expected return if you remain invested until maturity, and there are no defaults on coupon payments – in contrast to investing in equities. The market is broad and not everyone understands how it works. Every day is different and I take great pleasure helping our clients and their advisers navigate this environment.

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Lending

Lending is a powerful way to unlock liquidity from your portfolio

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Annerien Hurter,
Group Head of Lending​


Borrowing capital against the value of your assets can help you pursue higher investment returns and meet other financial objectives.

I believe leverage is a powerful but often overlooked strategy to improve investment performance and solve other financial challenges. Our lending team can help you unlock liquidity from your assets in order to take advantage of today’s low interest rates through customised lending solutions.

When you borrow money against the value of your investments, it’s called a Lombard loan. One of the advantages is that it allows you to access money without having to sell any holdings at a time when it may not be suitable, such as when markets have suffered a period of poor performance.

It’s a popular choice for those who don’t want to interrupt a long-term investment strategy. For instance, I recently arranged a loan for a family based in Europe to a buy a property in the US, where one of their children is attending university. This approach also means they don’t have to open an account there, which is challenging and time consuming.

Others use lending to enhance returns because it allows them to take advantage of tactical investment opportunities as they arise. Often when investors need to unlock liquidity their first thought is to sell assets. Setting up a line of credit against the value of your portfolio may be a more effective strategy. You retain control of your core holdings and gain immediate access to funding for tactical investments.


Enhance investment returns


When investors seek higher portfolio returns, they can adjust their investment strategy to take on more risk. However, adding leverage against the value of your investments can be a more efficient way to improve performance, while maintaining your asset allocation. When the cost of borrowing is low enough, as it is today, our analysis indicates that volatility is not greatly impacted by a moderate amount of leverage.

We’re also able to arrange other types of specialist loans on attractive terms, such as mortgages for those with non-standard types of income. Many of our clients have interests and assets in multiple jurisdictions. With lending specialists across continental Europe and the UK, we’re able to provide cross-border lending solutions.

You can keep track of everything online using the My Quintet app. That includes information about any loans and an interactive tool to see how they are influencing portfolio returns. This secure platform uses multiple layers of the latest encryption technology to protect your data.
 

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Sustainable investment

We’re finding lots of ways to transition investment portfolios to a more sustainable strategy

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James Purcell, Group Head of Sustainable Investment


I believe the investment industry has a large role to play in funding the firms and technologies working towards climate neutrality. Our work highlights investment opportunities in low-carbon equities and green bonds, as well as the value of verified emission certificates.

In order to guide our approach, we’ve introduced a straightforward, yet effective, lifestyle and investment framework in pursuit of climate neutrality called ‘reduce, transform and remove’.

Reduce: consume fewer resources and create less waste.

Transform: innovate by adopting and funding new sources of energy, supporting new technologies and re-engineering supply chains through a circular economy.

Remove: actively remove CO2 from the earth’s atmosphere by ecological or engineering methods.

 

Putting it to work for your investments


Typically, a robust investment portfolio has both bonds and equities working together. Equities are great for deploying a reduction strategy. We can measure the carbon emissions generated by companies and then calculate an equity investor’s associated ‘share’ of them.

We can construct a globally diversified equity portfolio that closely mirrors the investment characteristics of conventional indices yet also exhibits a 70% reduction in associated carbon emissions.

Bonds can be a powerful instrument for transformation. In particular, green bonds are debt instruments where the funds raised are used exclusively to fund green projects, such as building new renewable power capacity.

We can construct a globally diversified investment grade bond portfolio that broadly mirrors the investment characteristics of conventional indices yet also support the following for every USD 1 million invested:
  • removing the equivalent of 350 cars from the road;
  • saving 40 homes’ worth of energy;
  • and reforesting or preserving the equivalent of 80 soccer fields.
In addition to equities and bonds, it is now possible to reach beyond financial markets and impact the real economy by proactively removing carbon from the atmosphere. Verified emission reductions (VERs), often called carbon credits, are supported by robust scientific methods and measurement techniques.

We favour the highest-quality VERs that are associated with additional carbon sequestration – such as reforestation. They are different to VERs that are associated with preventing carbon release – such as forest protection. I believe investors can combine liquid investments with VERs, with the latter being used to offset residual carbon associated with equity investing to create highly impactful portfolios.
 

Quintet Earth


We are pleased to announce the launch of Quintet Earth, a new climate neutral fund based on the principles of our new lifestyle and investment framework called ‘transform, reduce, remove’. We believe it to be the world’s first climate neutral multi-asset fund. Click here to discover Quintet Earth.


  More about Quintet Earth
 
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This document is marketing material and has been prepared by Quintet Private Bank (Europe) S.A. This document is defined as non-independent research because it has not been prepared in accordance with the legal requirements designed to promote the independence of investment research, including any prohibition on dealing ahead of the dissemination of this information.

This document is of a general nature and does not constitute legal, accounting or tax advice. This document does not provide any individual investment advice and an investment decision must not be based merely on the information and data contained in the document. All investors should keep in mind that past performance is no indication of future performance, and that the value of investments may go up or down. Changes in exchange rates may also cause the value of underlying investments to go up or down.

The statements and views expressed in this document based upon information from sources believed to be reliable – are those of Quintet Private Bank (Europe) S.A. as of 07 December, 2021 and are subject to change.

Copyright © Quintet Private Bank (Europe) S.A. 2021.
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