"Even today, even older savers on the verge of retirement, should keep part of their portfolio in stocks. One of the risks you face in retirement is inflation, and investing in debt carries many risks which are exposed to inflation. Stocks provide protection from inflation. So, you still need a portfolio that can reduce this risk," says Patrick Reinkemeyer, president of investing consulting firm Morningstar Associates LLC, in an interview with "Globes", at the very time when it seems all investors in the market, especially institutional investors, are reducing their exposure to equities.
Says Reinkemeyer, "Together with the longevity risk, when savers outlive their savings, investors, and that includes older people on the verge of retiring, have an increased need for an equity component in their portfolio. Stocks offer protection against these two risks."
Joe Grause, director of international investment consulting at Morningstar Associates Europe, stresses that for him, this component is essential, especially given that institutional entities need to create differing savings profiles, determined by age, and the variation in risk aversion between savers. "We're not talking about low exposure - even in a pension savings portfolio, an older investor should have exposure of 35-40% of the portfolio," he says. This is still larger than the standard exposure rate in the Israeli institutional market, even after taking into account that the US equities market is different from the Israeli one, in terms of more established companies traded.
Morningstar provides research services and investment analysis tools, principally for the mutual fund industry. The company operates through three divisions - an individual segment which offers advice on stocks and other products; an institutional segment which provides investment consulting on investment monitoring and asset allocation for funds of funds; and a web-based institutional research platform that provides research and tools on securities and analysis of fund performance. The company is represented in Israel by Israel Funds Observer (IFO). Morningstar does not currently have any institutional customers in Israel, and Reinkemeyer and Grause were here to get acquainted with Israeli investors and learn about the needs of the players in the local market.
Globes: Is this really the time to be courting new customers? Everyone is heading for the shelters.
Reinkemeyer:"This is a good time for us to enter the Israeli market. When everything is going well on the markets, everyone thinks he's a good investor. When times are tough, it becomes clear that you need experience in the market, and right now this is a really tough period and environment for investment management. Everyone is finding it hard - investors and governments - and it is important to stick with the future targets that have been set for the investment portfolio."
Grause:"People are scared and they want liquidity. For us, this is the time to get acquainted with the Israeli market, rather than thinking about the immediate business."
What is the best thing to do today to survive what is currently happening in the markets?
Reinkemeyer:"There were very few things that could have been done in the current market, that would have isolated you from what's happening. That said, diversification is the best defense when building a long-term portfolio, even today. That means diversification in investment allocation, and diversifying among the different managers in the portfolio, so as to create a portfolio that will reduce risk and, hopefully, increase the return over time. Today, when everything is being sold, it doesn't help."
And what do you feel are the points that should be stressed to investors today?
"It is important, even today, to stay in the market, and remain neutral in accordance with the allocation you originally set, so as not to miss any opportunities, especially when you remember that market timing is very difficult.
"You must always stick with your goals as an investor. This is a good time for long-term investors to carry on investing in the market on a continual basis. Depending on what your long-term goals are, it would be worth your while to maintain the proportion of equities in your portfolio. Investors will most likely have to invest more in equities today, to maintain the proportion of the equity component that they want in their allocation."
Grause:"It's important that you stick to your plan in times like these. You have to remember that markets are cyclical and volatile by nature, so it is important that you stick with your portfolio and the rules you set for it, because making a change today could wreck the portfolio over time."
In recent months, Israeli institutional investors have been reducing their exposure to overseas markets, as a proportion of the overall portfolio, whether as a deliberate policy change, or following the fall in the value of overseas investments, without compensating for the proportionate decrease in these investments in their portfolios. Do you feel this a healthy trend?
Reinkemeyer:"Looking over the long-term, maintaining international exposure is a wise move. Even Israel, which is fairly small, needs exposure to developed and developing countries. That the market is falling doesn't mean you shouldn't be in it but rather, it raises the question as to whether you should increase your overseas allocation. Extensive exposure to one market increases the exposure to a lot of highly correlated risks."
You stress the importance of diversification in the portfolio over time, but you need a minimum amount of assets for this, and many of the local institutional investors are quite small, compared with those in the rest of the world.
Reinkemeyer:"You can a build diversified, global portfolio even with a small amount of money, and be successful with, for instance, even $10 million in assets, by using mutual funds and ETFs."
With sums like these, you don't have any access to illiquid assets, such as venture capital funds, for example, which are an important component in long-term portfolios.
"Illiquid investments are of a different breed and are not suitable for small institutions, although there is a solution for this. For instance, you can invest in baskets of small technology stocks. You can achieve exposure to this field with nominal investments.
"With small sums, you can build a diversified portfolio using ETFs, mutual funds, managed products and so on. You can buy shares in a fund with international diversification for hundreds of thousands of shekels. That's the advantage with mutual funds - they offer diversification in one investment."
Grause:"ETFs give exposure to an entire market or sector at a low price."
In any case, Morningstar advocates maintaining the allocation the portfolio had before the crisis, and advises against making changes while the crisis is still in full flight.
Published by Globes [online], Israel business news - www.globes-online.com - on November 24, 2008
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