Adam Murchie
There’s been a marked uptick in commentary about market cycles, market pricing and the risk of correction. Pricing and valuations are heightened across many asset classes, bringing into play the threat of downside risk. Given this scenario, how can investors’ portfolios be best positioned to withstand a downturn?
One aspect rarely addressed is the impact investment structure can have on investment performance.
The liquidity conundrum
Adam Murchie, director of Forza Capital commented: “Many investment operatives are fixated on the need for liquidity, that is, the ability to enter and exit an investment when you want.
“Without doubt, liquidity and the ‘easy’ strategy of picking an index as opposed to specific stocks has given to the rise and rise of ETFs.
“However, just as the ETF’s have risen in value off the back of their own momentum, what happens when the pendulum swings the other way?”
Liquid markets rely on rational investor behaviour to operate efficiently. However, as history proves, in falling markets investor behaviour becomes irrational and thus market movements are often magnified.
The liquidity and structure of ETF’s amplifies this even further, much in the way gearing affects an investment outcome – as such, this is something that needs to be considered when assessing a portfolio for risk.
Illiquid investment structures
“In property, which is our area of expertise, we have the luxury of having well established, well informed listed (liquid) and unlisted markets,” said Mr Murchie.
“As such, property is an exemplar for highlighting how a different investment structure can result in materially different outcomes.”
Figure one illustrates the returns from listed property and unlisted (core) property for the three years pre and post the GFC and is, therefore, is a strong representation of the impact of the cycle.
