Barclays Wealth’s Gurwitz concerned about ‘blessings’ bestowed investors so far this year

Aaron Gurwitz, Barclays Wealth chief investment officer, says in a preface to the latest the firm’s latest Compass report that he remains concerned about risks to investors, despite positive performances this year from multiple asset classes.

Dear clients and colleagues:

When I’m worried and I can’t sleep
I count my blessings instead of sheep,
And I fall asleep counting my blessings.
-Irving Berlin

The first two lines of these lyrics describe my feelings about investments right now. The last line is a warning.

I’m worried. The condition of the global economy remains fragile, and the sustainability of the post-2009 recovery depends, more than usual and too much for comfort, upon the good intentions and skills of politicians. The long list of worries would not cause insomnia if it made sense just to sit in cash and nod off, knowing that at least I wouldn’t be any poorer when I awakened. But risk assets are too cheap for that to make sense in my view, and if I did cut risk sharply, I’d probably lie awake worrying about potential missed opportunities.

I count nine blessings. Year-to-date returns are positive on all nine of our strategic asset classes and some have done very well indeed. After the experiences of the last few years and in the context of a growing list of serious risks, a low-volatility uptrend in stock and high-yield bond prices counts very much as a blessing. So, one cure for sleeplessness may be to keep a copy of one’s last account statement by one’s bedside.

A restful night’s sleep is a fine thing, but complacency is not. Positive returns are a blessing, to be sure, but not an entirely unambiguous one, I think. For one thing, two thirds of the way through the year the returns on stocks and high-yield bonds are higher than we might have expected for the full year, especially in a world where the risk-free interest rate is close to 0%: after the summer’s rally, some markets may have “gotten ahead of themselves.” Further, the whole idea behind a diversified asset allocation is that some pairs of asset-class returns should be uncorrelated; they should not all be going up or down at the same time. Finally, given all the risks evident today in the world, a rebound in market volatility would not be at all surprising. So, while I’m glad that almost all investments are doing well, I can’t shake a queasy feeling that markets are not behaving normally. And that in itself is another worry.

Many of the political/economic/financial risks we continue to face have been with us for a long time. It is easy, for example, for the euro zone sovereign debt saga to become ambient background noise. So complacency is a real risk. However, it is a risk we can control by our own actions. Count your blessings, but remain vigilant. If particular investments have appreciated so much that they’ve become too large a proportion of one’s portfolio, trim them. If your bond portfolio’s average maturity has drifted to become too short to provide protection against disappointing economic growth, do some extension swaps. If you can, in effect, lock-in gains by hedging downside risk with options, you may wish to consider doing so.

And pleasant dreams.


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