Structured products remain a source for portfolio diversification in the face of increased volatility, according to Mark Haefele (pictured), global chief investment officer of UBS wealth management.
"Because of what's happened with bond yields, one of the greatest difficulties of this period is finding things that are uncorrelated and getting them in the portfolio for diversification, so, people are looking into structured products," said Haefele, during a media briefing on July 12 about UBS Global Wealth Management mid-year outlook.
Hedge funds and private equity also provide more market neutral strategies, according to Haefele. "This is a point of a cycle where hedge funds tend to do better - that is when central banks are hiking rates," said Haefele. "Many of our clients don't have 14 to 18 percent allocations to alternatives like hedge funds or private equity and, therefore, their portfolios are probably far too correlated to, let's say, just the equity market."
Haefele's emphasis on alternatives comes as UBS prepares its clients for the return of volatility amid the ongoing trade spat between the US and China, and because bonds no longer serve as a stabiliser in a portfolio as they have in the past. "Bond yields have come off their lows, but they're still, on a historic basis, very low," said Haefele.
Despite concerns that a bear market may be looming, Haefele pointed out that the bank finds it very difficult to say 'go underweight risk assets or equities' due to the current robust global growth, and, particularly, strong US corporate earnings data.
The Swiss bank will keep an eye on what American companies signal during the second quarter earnings season, according to Haefele. "We'll be watching closely the guidance from corporations, because, if they use this trade war or potential trade war as a situation to really take down earnings expectations, that's probably going to be the next information source that will significantly impact on markets," said Haefele.
UBS will remain overweight in emerging markets sovereign bonds that are US dollar-denominated and has also included downside protection in their portfolios through the S&P 500 index out-of-the-money put options, according to Haefele.
Haefele also highlighted global diversification, noting that different regions are affacted differently by political noises. "While the MSCI Global Index is up for the year and the US is up strongly, Shanghai is down," he said.
On a broader note, UBS is advising its clients to take a longer-term perspective and pick trends they believe in, according to Haefele. "For us, aging population, the growth of population and increasing urbanisation of the population - we've been able to successfully pull a variety of themes around that," said Haefele. Sustainability and what societal impact an investment holds continues to be a crucial point of wealth management, although not enough liquidity remains as a challenge, according to Haefele.
During the first half of 2018, UBS Wealth Management has advised clients to use barrier reverse convertibles and options strategies to prepare for a more volatile bull market.
The use of structured products in the intermediary market has increased markedly over recent years, according to Nick Tucker, head of UK domestic at UBS Wealth Management. "Advisers and investors are more aware of how structured products can help to balance an investment portfolio via capital protected or other hedging structures," said Tucker.
"Structured products can be so many things (defensive, leverage) and some high net worth investors use them very actively, and really understand the market and issuer risk, and they also understand that different structures work well at different times," said Tucker. "We do recommend them as part of our portfolio construction approach and we believe they should represent between 15% and 20% of a portfolio."
Related stories:
UBS eyes BRCs and buy-write strategies to navigate high vol environment
We want to provide an institutional quality and set of solutions to private clients, UBS
UBS and Solactive kickstart sustainable partnership via high-grade development bank debt series