How to do a good job in wealth planning in the hedging year of the series of salons of "Domestic α, Global β Selection"?

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Dr. Zhang Jihua, Assistant General Manager of Harvest Wealth

On the occasion of the release of Harvest Wealth's House View in the second quarter of 2024, Dr. Zhang Jihua, Assistant General Manager and General Manager of Research and Investor Return Center of Harvest Wealth, explored some fundamental questions of family wealth planning with investors: what should we focus on, what should we avoid, what opportunities should we seize, and what risks should we guard against in the year of hedging in 2024?

Dr. Zhang Jihua mainly discussed the following five types of thinking:

1. Hedging thinking: The macro background proposed by House View this time is to hedge risks such as decoupling, deflation and major changes unseen in a century;

2. Winning rate thinking: Under any strategy system, the winning rate of different financial tools at different time nodes is different, and professional investment consultants, as experts who understand financial tools, should conduct a comprehensive evaluation of the winning rate of the investment portfolio for customers according to the financial goals and deadlines given by customers;

3. Track the constant needs of customers: TRP depicts the deadline, goal and achievement rate, and helps customers meet different needs such as value-added, interest-earning, and protection in family wealth allocation through matching;

4. Account thinking: Standing at the account level, reorganize the relationship between investment advisory services and customers, if the tools in the customer's account have been exposed to too many risks, the account should be used as an index to supplement the available tools, especially pay attention to the missing tools in the account rather than the tools that have failed;

5. Global thinking: Construct the idea of "domestic alpha, global beta", the domestic stock market with low valuation in the second quarter may be advantageous, while the overseas stock market should consider taking profit appropriately and maintaining the basic position to deal with it.

1. Hedging thinking

At present, we are actually facing many challenges at the macro level, including the challenge of insufficient effective demand internally, and the challenge of great power competition, the challenge of industrial chain reengineering and the test brought about by fierce geopolitical conflicts. For investors, it is not easy to accumulate a lifetime of wealth, and the way to preserve wealth is often not to attack, but to hedge.

Recently, the yield on domestic 10-year government bonds has fallen below 2.4%, but there are still a large number of institutions actively buying, which can be summarized as "asset shortage". In our view, institutional and individual investors are likely to face an extended "asset shortage" in 2024, and a powerful tool to hedge against this deflationary environment is high-dividend assets. When the gross yield (whether it is the yield of wealth management or the yield of treasury bonds) is slowly declining, investors actually need some assets that can pay relatively stable dividends and have long-term sustainable operation ability in the future, so that the dividends of assets can become the source of their long-term dividend income.

Based on this, Harvest Wealth recommends investors to pay more attention to those more resilient strategies and tools as the ballast stone for family wealth allocation:

1) The U.S. dollar is likely to remain strong for some time, which is expected to form a certain protection and hedge for cross-currency investors

2) Short- and medium-term U.S. Treasury interest rates are relatively high recently, ushering in a better allocation opportunity

3) Gold, some digital assets, commodity CTAs and macro hedging strategies are all asset classes that benefit from the sudden amplification of volatility

4) The hedge of global core infrastructure is the impact of the restructuring of overseas supply chains on investors' household wealth allocation

5) Hedge funds and protection assets that are less correlated with stocks and bonds are also better risk hedging tools

Second, the probability of thinking

No single tool is enough to go through all cycles, so from the idea of winning first, there is always a class of tools at some point in time that is better suited for the present. The more critical question then becomes whether you can find the "right" type of instrument and allocate it to the investor's account in a certain proportion.

What is the biggest difference between the market in the second quarter of 2024 and the first quarter? However, the downward trend experienced by A-shares in the first quarter has objectively also allowed us to harvest a relatively solid "low", as the saying goes: "Don't waste every fall". When the market valuation is relatively low, the winning rate is always higher than when the market is at a high level. Taking the snowball strategy as an example, if we observe the concentrated knock-in time of the snowball from 2007 to 2024, we can find that if we choose to invest in the new snowball strategy during the concentrated knock-in period, the knock-in probability of the new snowball strategy tends to be relatively low. We recommend investors to pay more attention to strategies that have been pressed to the ground for a long time, but are expected to achieve a dilemma reversal.

Then turn your attention to active equity funds. The performance of the CSI Biased Equity Fund Index has been suppressed in the past three years, but given that this type of strategy has historically had good mean reversion characteristics, we can generally make an assumption that strategies represented by high dividend dividends and low volatility are more likely to undergo mean reversion in the next 2-3 years.

3. Track the constant needs of customers

In the process of helping clients with wealth planning and capital planning, the important mission of financial advisors is to make the tool serve the client's own wealth goals.

No matter how the market changes, whether the bear market is coming or the bull market is staged, the needs of many customers have not changed much, and the pursuit of stable wealth preservation and appreciation has always been the same. The significance of the existence of professional wealth management institutions is to let the needs of customers drive us to configure the necessary tools, match the corresponding solutions, and effectively improve the probability of achieving the goals through the TRP (TRP refers to the deadline, goal and achievement rate respectively) portrait.

Harvest Wealth's TRP tool system will comprehensively evaluate all kinds of tools on the market shelves, and constantly innovate, iterate and optimize the tools, hoping to meet the financial needs of customers with a new thinking framework and professional solutions of buyer-side agents.

Fourth, account thinking

From the perspective of account allocation, the funds in the residents' wealth management account can be divided into three pockets, namely protection, interest and appreciation. As the ballast stone of the wealth management account, the guarantee reflects the bottom-line thinking of account allocation, the interest income essentially reflects the dual needs of customers for principal and stable cash flow, and the appreciation corresponds to the long-term value-added goal of the customer's RMB-denominated assets. In the actual account planning process, it is necessary to fill the three pockets with different tools, and optimize or even replace the tools in a timely manner, which is the account dynamic balance thinking.

Note: The value-added, interest-earning, and protection mentioned in the article are only conceptual classifications based on customer needs, and are not based on the risk level of products/services. Classification is for reference only, and results may vary between different classification methods. It does not constitute the promotion of any product or service, does not constitute specific investment advice, and does not represent the scope of our company's sales. The market is risky, and investors need to be cautious. There is no guarantee that investors will make a profit, nor does it guarantee that the minimum return or principal will not be lost.

In the second quarter of House View, we recommend taking a closer look at the respective proportions of allocation and trading instruments in interest-bearing accounts.

From the perspective of planning, the most typical characteristics of allocation-based interest-earning tools are: relatively stable, relatively controllable fluctuations, and high liquidity, which can combine multiple assets together and hedge to a certain extent according to the established strategy, forming a multi-strategy allocation, and basically no longer need to make too much timing. Such tools include all-weather risk parity allocation strategies, short-term bonds, cash wealth management, physical interest-bearing assets, equity interest-bearing assets, etc.

Transaction-based interest-bearing instruments are often in the process of market fluctuations, according to the law of large numbers to calculate the winning rate, and at the low point of timely entry, with the continuous accumulation of net value, after reaching the target point, and then according to the relevant agreement to take profit and exit, pocket dividends. Normally, this kind of strategy requires a certain degree of timing and judgment of the market, and the representative tool is the snowball strategy of pursuing "buy low and sell high".

In general, most investors have relatively few allocation instruments in their pockets, while there are relatively many trading instruments. The essence of account thinking is to "check and fill in the gaps" and strive to achieve the optimal solution of portfolio allocation.

5. Global thinking

Although more and more domestic investors have realized the importance of global asset allocation, the proportion of overseas asset allocation among mainland investors is not as high as that of developed market investors. In this House View, we also have hints on finding opportunities for global betas.

In our view, the global beta is likely to be:

· Historically, the U.S. stock market and the Indian stock market have the characteristics of a long bull

· Physical assets

· The general trend of the industrial revolution of AI

· U.S. Treasury bonds and gold in the Fed's future interest rate cut cycle

For example, in the past period, we can see that the beta of U.S. stocks has been rising rapidly, and some investors are worried that U.S. stocks are already at high valuations, but from a long-term perspective, we still believe that the long-term bull of U.S. technology stocks is very important. Even if there may be a short-term decline in the strategic level of beta opportunities, we still recommend that investors with a low proportion of U.S. stock allocation can choose suitable opportunities and gradually build positions, and make reasonable investment layouts according to their own risk appetite and target expectations.

Disclaimer: The information or views expressed herein do not constitute investment advice to any person, nor do they take into account the particular investment objectives, financial situation or needs of the recipient, and should not be relied upon as the basis for investment decisions. The data and information contained herein are derived from publicly available market information or other sources that the Company believes to be reliable, but the Company makes no representations or warranties, express or implied, as to their accuracy or completeness. The content of the third-party reports, materials, information, etc. reproduced in this article only represents the views of the third party and does not represent the position of the Company. There can be no assurance that the views or statements contained herein will not change and the Company may issue reports at different times that are inconsistent with the information, opinions and projections contained herein. The examples of wealth planning mentioned in this article are only based on customer needs, and the value-added, interest-earning, and protection mentioned are only conceptual classifications based on customer needs, rather than classification of products/services according to risk levels. Classification is for reference only, and results may vary between different classification methods. It does not constitute the promotion of any product or service, does not constitute specific investment advice, and does not represent the scope of our company's sales. The market is risky, and investors need to be cautious. The Company does not guarantee that investors will make a profit, nor does it guarantee that the minimum return or principal will not be lost. Investors should fully consider their risk tolerance and risk identification ability, and invest prudently.