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What is the best way to add risk back to portfolios?

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Johanna Kyrklund, head of multi-asset investments at Schroders, gives us few tips on adding risk back to our portfolios.
What is the best way to add risk back to portfolios?

She says:

“With events in Europe casting a shadow over the global economic outlook, investors should be looking for assets which have a valuation cushion, and which are liquid. My view is that risk is best added through developed market equities.

“In terms of other assets, corporate bonds offer relatively good value in the yield spread over lower-risk, but expensive, government bonds – but absolute levels of yield are not so attractive. Everyone remembers the amazing buying opportunity at the end of 2008 – and consequently many investors are in love with credit….but valuations simply aren’t as compelling as they were back then.

“In terms of emerging market debt: again, yields are not as attractive as the buying opportunities we’ve seen in the past, and if market conditions deteriorate they can become illiquid. Furthermore, emerging market currencies are vulnerable to a growth slowdown in China.

“However, there are good value opportunities in the equities of several high quality companies in developed markets. The problem is their volatility, as everyone holds their breath to see whether disaster in Europe will be averted. So my recommendation would be to water down a portfolio of developed equities with cash as required, rather than investing in lower volatility, expensive assets.”

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