Being selective in such a zero-sum environment can be advantageous. Once again, using focused active strategies capable of generating alpha in the innovative sections of the market can be a fertile source of growth and returns. The risk of this approach is that growth pockets have become highly sought after and expensive.
But unlike the bond proxies, some companies deserve higher valuation due to strong sales and earnings growth. Under this selective approach, one should not just concentrate on the popular technology and healthcare sectors that have enjoyed the limelight, but rather blend with the out-of-favour.
The first benefit is that there are plenty of missed self-help growth opportunities outside of these two areas that are cheaper due to their lower overt coverage, and the second is that the resulting exposure is more balanced in case of a change in markets.
Despite the best efforts of investors, we do not believe markets can be timed, so while focusing on the obvious pockets of growth, investors should keep an open mind by rigorously assessing opportunities in the under-owned and un-loved portions of the markets as they will provide balance and opportunity to the portfolio.
In terms of opportunity, some of the areas traditionally labelled as value will provide growth, and these opportunities can currently be picked up at bargain prices, even excluding the effect of re-ratings.
Because the low growth regime has seen low volumes and intermittent bouts of volatility, in particular through style and sector rotations, it would be prudent to spread equity risk in a balanced fashion while capturing the pockets of growth available.
When markets turn, either in a recession or growth spurt, the portfolio must be able to protect capital or produce gains. Investors must consider that bunching into obviously crowded trades is not the only source of growth available. Just as we should reassess the current risk/return profile of fixed income, we should also reconsider what has been traditionally regarded as growth, quality or value in order to pick up on the real growth available, even when it is disguised as a strongly contrarian idea.
The low-growth regime provides investors with unique and severe challenges, so a fresh look at existing asset classes is vital. Aside from equities and fixed income, there are also plentiful opportunities in the derivatives space where structured products for example, can give pragmatic investors valuable asymmetrical payoffs. Where there is a requirement for known and stable income, such products can be a boon in this environment.
