Credit Suisse is signalling to clients
that, amid the new volatility in the markets after the subprime
crisis, they should consider remaining invested in the markets, and
with the right strategies should still be able to grow their assets
significantly in the longer term.

The correct investment stance may be to invest ‘across the cycle’
and mitigate the risk of losses with improved asset allocation
models, its analysts say. The Credit Suisse stance comes at a time
when a number of private banks are starting to try to manage down
clients’ expectations of future investment performance at a time of
financial market uncertainty.

Credit Suisse analysts say that total return strategies “can be
used to participate in long-term growth phases and control the risk
of possible capital losses in the current market environment”. In
the current uncertainty, the question is whether investors should
adopt a passive strategy, they add, commenting in the latest issue
of the Swiss bank’s Global Investor study series. In the short and
medium term, cycles are likely to remain turbulent for equity
investors.

Too much short-term switching in a portfolio will eat into returns,
but a purely passive strategy when prices are falling could also
lead to (book) losses of between 40 percent and 80 percent over
several years.

Between 1926 and 2006, it sometimes took more than 20 years to earn
a higher annualised return on Swiss equities than on Swiss bonds,
they note.

So, Credit Suisse examines whether simple decision rules could have
mitigated the risk of investing in equities. Their analyses show
that simple indicators such as seasonality (‘sell in May and go
away’), momentum, central bank monetary policy and interest-rate
structures on the capital markets can be a useful source of
investment tips. A combination of these factors has led to higher
returns with a lower downside risk.

These results suggest that sophisticated tactical asset allocation
models, including total return or absolute strategies, can offer
attractive returns while at the same time substantially reducing
the loss risk.

Objectives

Such strategies have two objectives – to achieve a minimum return,
often equal to the money market return plus 2 percent to 3 percent,
and at the same time to minimise the loss risk. Most of these
strategies aim to generate a positive return over a 12-month
period. Total return strategies draw on a dynamic investment
approach and diversification to reach their objectives.

Demand for these strategies tends to increase when markets become
volatile. Relative return strategies, by contrast, track their
performance against a benchmark. This approach means that fund
managers can beat the benchmark despite making net losses for their
clients, for example, if the fund loses 12 percent but the
benchmark index falls 20 percent.