Defence key to World Cup and investment glory

Following the soccer World Cup through its tense final stages can serve up enough drama to cause heart palpitations, but it can also offer prudent investment advice, according to an industry expert.

The attacking flair of players like Ronaldinho and Rooney typically capture the headlines, but PIMCO vice-president Matthew Clark believes it is defence that will be the key to success — for both the tournament and investment professionals.

“Certainly it is exciting to see your team score a plethora of goals just as it is exciting to watch your growth assets deliver double digit returns,” Clark wrote in a recent thought-piece titled ‘Defence wins championships’.

“But whether you keep the earnings in your portfolio or earn a victory on the field depends much more on your, or the team’s, ability to play solid defence when the offence begins to falter.”

According to Clark, previous enthusiasm for risk and the injection of high amounts of liquidity into the capital markets created conditions well-suited for “offence-oriented assets to score easy ‘goals’”.

However signs of “agitation in the global capital markets” now foreshadowed liquidity drains that “usually ended poorly for the most talented offences (asset classes) as risk is re-priced in the marketplace”.

As a result, defensive mechanisms such as yield and income-focused investments were the best strategy for holding on to the hard-earned returns of previous years, Clark said.

“With yields now around 5 per cent in the US, we think the asset class offers more meaningful downside protection should the offence begin to falter,” he said.

“As we begin to navigate a less liquid world, we strongly believe that the ability to play defence well will define success in the years ahead, and while this approach may not be how fortunes are ‘made’, it is certainly the method by which they are kept.”