Equities: Mind the Gap(s) in Your Portfolio

Equities: Mind the Gap(s) in Your Portfolio

Diversification and the right asset allocation are the two most important principles for investors. Unfortunately, they are ignored or overlooked all too often.

Analysis by Credit Suisse has shown that roughly one-third of investors could increase their yield with even less risk. This can be achieved through better portfolio diversification by means of professional asset allocation.

In most cases, the main cause of these varying yields is that significantly less is allocated to equities than would be the case over the long term in a balanced investment profile. This difference – also known as a gap – has negative consequences for the investor. The reason for this is that equity investments are a part of any well-diversified investment portfolio – after all, they are the long-term source of investment return. Figure 1 below provides an example of this in the Swiss market. Equities have outperformed bonds by about 65% since 1993.

Switzerland: Liquidity, Bond, and Equity Returns in a Long-Term Comparison

Switzerland: Liquidity (3M), Bond, and Equity Returns in a Long-Term Comparison 

For illustration purposes only 

Since equities have a much larger range of fluctuation – referred to as "volatility" – they require a long time horizon, good diversification, hedging of positions particularly after strong market development, and a cool head in the face of corrections. Too often, people divest in the trough at a considerable loss.

The global economy is currently in a synchronous recovery phase. Some of the positive development is already being reflected in the market prices. In particular, the US stock indices have begun to rally (see Fig. 2). However, there are select opportunities for equity investments in regions where economic recovery has stalled.  

US Indices in Particular Are Rallying

US Indices in Particular Are Rallying

For illustration purposes only

Equities Often Outperform Bond Yields

Equities should not be rejected when compared to bonds, either. In the current investment environment of persistent record-low interest rates and accommodative central banks, investors are seeking yield in the bond sector. As a result, the returns on high-rated bonds are at rock bottom, especially when compared to the dividends that the same companies pay on their shares.

This trend has been seen for several years now as central banks have increasingly been purchasing high-rated bonds in order to stimulate the economy after the 2008 financial crisis. This is why defensive dividend stocks that use current cash flow to pay share yields rather than leverage remain attractive.

Further Diversification through Investing in Social Trends

The thematic investment approach focuses less on the daily ups and downs of the financial markets, and instead seeks to profit from the predictability and sustainability of multi-year trends. Investors are turning to thematic investments in order to take advantage of demographic and socioeconomic trends and scientific progress.

Credit Suisse has launched five major themes for this: Millennials' values, Silver economy, Multipolar World, Technology at the service of humans, and Infrastructure.  

Summary: How to Invest with Few Attractive Investment Opportunities

  • Diversified investment products, such as discretionary mandates, offer a professional approach to investing and make investment decisions for you.
  • Defensive dividend stocks are still attractive for investors, particularly when compared to bond yields.
  • Long-term growth themes, so-called "supertrends" that are driven by demographic changes and technological progress, offer interesting investment opportunities.

We will be happy to help you select the right products and investments. Please contact your client advisor or schedule a personal consultation to learn more about the current investment initiatives at Credit Suisse Switzerland.