Rethink your investments post crisis, says BNY Mellon’s Jamie Lewin

Jamie Lewin, chief investment officer BNY Mellon Asset Management International, says that investors face a difficult decade ahead, and so should rethink their approach to investments in eight key areas.

The catalyst for the change is the financial crisis, he said. This has upended widely held beliefs in areas such as portfolio management theory and requires new ways of approaching implementation of diversification and preparation for risks such as inflation.

The eight areas he highlighted at the BNY Mellon Wealth Management seminar on family governance include:

Rethinking asset allocation

This is perhaps mostly occurring at the academic end of the spectrum of debate, in turn influenced by a look at how efficiency frontier assumptions failed during the crisis.

Thematic emerging market investing

Investors will have to rethink the risks and returns associated with emerging markets if they are going to develop a 20%-30% exposure, in line with the necessity over time to have exposure to the faster growing markets of the world.

However, this raises questions about how to earn a return, and what the suitable risk premium should be. It is also important to recognize the different types of emerging markets, such as Brazil being very different to a market in Asia. There will be key themes driving emerging market investments going forward too, and it will not suffice to look to indices. For example, the theme in China is about manufacturing, whereas it has been about consumption in Korea, and investment in Brazil. This leads to questions around how to set up exposure to such different emerging market stories, rather than just setting up a typical broad based emerging market portfolio.

Preparing for inflation

The danger for investors is that central banks may not withdraw their ongoing support quickly enough as inflation picks up. For the past 15 years trade patterns resulted in imported deflation to the West, but this is changing into imported inflation, for example, as wages rise in formerly cheaper manufacturing nations. Driving inflation too are supply side shocks, such as rising energy, raw materials and food prices, as sources of inflationary risk. Investors need to think about building in inflation protection at reasonable cost, especially as unexpected inflation historically is a “killer” of wealth.

Widening the search for income

Here is a function of demographics, with populations getting older and a resulting shift to income away from capital growth. The challenge is that at the same time that the income component is increasing its share of portfolios, it is taking place in a low yield environment. Investors need to apply a creative approach to income generation, for example, into more diversified assets, perhaps accepting more risk or even accepting less liquidity against improved income.

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