Monday, January 27, 2020

Early days for Investment Trusts, but a viable future ahead

Equity markets are at an all-time high once again and with the economy in the midst of an unscheduled slowdown, there is an increasing desire among investors to reduce portfolio volatility. A simple way to do so is to identify assets with daily return characteristics unrelated to each other.

Theoretically, if each component of one’s portfolio moves independently on a daily basis, the daily volatility of the portfolio should be lower than that of its volatile components. Since in most cases the most volatile component is equity, the attempt has always been to find assets with daily return characteristics unrelated to it.

Traditionally, debt and gold have played this role in a portfolio. Recently, of course, gold has been actively discussed, especially after its sharp appreciation in 2019. However, both debt and gold come with certain long-term return characteristics that may not suit all investors. The overall low returns generated by low-risk debt portfolios, recent experience with credit defaults in higher-risk debt portfolios and the lumpy long-term returns generated by gold are all valid reasons for investors exploring other options. But is there anything else an investor can turn towards to reduce overall portfolio risk? Fortunately, the answer is yes.

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This note was published on on January 27, 2020

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