Investors need to be flexible given the US situation.

Ever since the U.S. Federal Reserve (Fed) Chairman Ben Bernanke’s “tapering” speech on 19 June at a press conference in Washington, D.C., which fueled investor anxiety regarding the future course of Fed monetary policy, many investors are asking one thing, is this the start of something more ominous?

We don’t think so. Global economies are structurally too weak and inflation pressures, for the most part, nonexistent for a potential rise in interest rates to signal the start of a secular bear market in bonds and other financial assets. This does not mean volatility won’t continue to be high, nor does it mean rates won’t notch higher before settling down. It does suggest global markets now expect a full Fed reversal rather than just tapering, such that there is a lot of bad news already built into the markets. As U.S. mortgage rates have risen back above 4%, there is an added drag on the economy that could affect current growth dynamics and keep inflation further retrenched.

So what does this mean for investors?

In such an uncertain environment, investors need to keep the following in mind.

First, they need to be flexible, retaining both the resilience to stay on the road when hitting S-curves and the agility to turn left or right when coming into T-junctions. This means having real diversification, being able to play both offence and defence, maintaining liquidity and dry powder, considering tail risk hedges and employing strong and proactive governance structures to be able to move quickly and forcefully when necessary.

Second, investors may want think about pivoting to “alpha” (with a focus on generating excess returns) as the days of easy “beta” (simply earning high market-based returns) are behind us. This includes building smarter betas, adopting better benchmarks and adding discretion in core portfolios. And, for those with specific absolute return, income or hedging needs, it means moving to more outcome-oriented solutions.

Third, we believe investors should stay active. This is more than a good health tip. It means maximising investment flexibility by not locking in passive allocations, beta exposures, portfolio structures and hedges. There are times when passive strategies can offer value, but likely not in the current environment.

Fourth, they need to be forward-thinking. Move away from asset-class-based to risk-factor-based asset allocations; from historical to forward-looking return methodology; from market value to GDP-weighted benchmarks; and from alpha-generating strategies that worked in the past to those better suited for today’s investment landscape. History provides important perspective, which we ignore at our own peril, but we have to look forward to stay on the road.

Finally, investors need to be patient. We’re still in a state of disequilibrium. Now is not the time to go all in or be all out.

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