4 high conviction ideas for conservative investors

Investors who are highly sensitive to loss (in other words, risk) might believe that excludes them from many of the biggest investment ideas. After all, we often conflate big ideas with big risks. But that doesn’t have to be the case, and even for the riskier assets, it can come down to what else is in the portfolio as a buffer for challenging times.

So, let's say you have a low risk tolerance – what would a high-conviction investment idea look like? And does a risk-averse investment approach need to be boring? You might be surprised.

I spoke to several investment managers about their high-conviction ideas for risk-sensitive investors for the next five years (and beyond, in some cases). Their ideas spanned a broad range of areas including the construction of your strategy, ideas for assets and products, and a big megatrend to follow.

And for those more open to risk, don’t switch off now. After all, we’re heading into more volatile times where a cautious approach could pay off.

On the scale of risk sensitivity, how conservative are we talking?

There are a range of factors that play into risk sensitivity.

Age, personal preference, and specific goals are just a few of the many factors that influence your tolerance, moving you higher or lower on the scale.

Wherever you start on the scale of risk tolerance, there’s no escaping the fact that one day, age will force you towards the lower end. It’s for good reason that retirees are typically considered the most risk-sensitive investors out there (and how that must grate for the once boundary-pushing boomer generation).

This is an audience that needs to grow their capital to keep up with inflation, draw an income from their portfolio and protect their capital because they:

1. Don’t necessarily have more funds coming in to top up withdrawals…they are retired after all!
2. Don’t have the same time frame to recover from market crashes.

From that perspective, it makes sense that if we are going to look at high-conviction picks for risk-sensitive investors, we should use this audience as the baseline. But these ideas could be useful for any end of the scale.

Idea 1: The megatrend

Megatrends are major long-term social, economic and structural forces driving changes to how we live, work and behave.

This might not sound like a pick for a conservative investor but hear me out.

There’s often government monetary support behind these changes, they are likely to run for decades, many of them span different asset classes (there’s your diversification) and you don’t need to jump into ‘start-ups’ with high risk to gain exposure.

Nick White, Global Strategic Director at Mercer, specifically points to one of the major talking themes of our times.

The green transition and climate change

While there is a range of directions investors can look at on this front, White particularly likes critical minerals.

“There are extraordinary volumes of critical minerals needed to build out solar and wind generation compared to natural gas generation. Similarly in the construction of electric vehicles versus petrol powered cars. There’s strong thematic support for critical minerals and we’re starting to see restrictions on trade from government. Australia is well-set for this given its lithium resources,” says White.

Lithium producers can be a mixed bag when it comes to risk, so investors could also look at infrastructure as a play in this area. Infrastructure is typically viewed as more defensive - and that should prick the ears of the risk-averse! 

Some of the big names in the transition are already established players.

For example, Sarah Shaw, global portfolio manager and chief investment officer for 4D Infrastructure, points to Spanish multi-national integrated electric utility company Iberdrole (BME: IBE) and Italian multi-national electricity and gas supplier Enel S.p.A (BIT: ENEL).

Even unexpected forms of infrastructure stand to benefit. 

Australian multinational tollroads operator Transurban (ASX: TCL) may also benefit from the movement to autonomous electric vehicles, explains Nick Langley, portfolio manager at ClearBridge Investments. That's because it means less space required between vehicles and in turn, the possibility of more lanes and more cars paying tolls at any given point in time.

Where to find exposure to the green transition

Those looking at critical minerals might look at pure-play mining companies (noting the risks), such as:

• Core Lithium (ASX: CXO), 
• Liontown Resources (ASX: LTR) or 
• Pilbara Minerals (ASX: PLS).

There are also managed options on this front, such as:

• BetaShares Energy Transition Metals ETF (ASX: XMET) and 
• Global X ETFs Green Metal Miners ETF (ASX: GMTL).

Those interested in exposure to infrastructure could consider a range of options such as Origin Energy (ASX: ORG), which is expanding into renewables. And Cleanaway Waste Management (ASX: CWY) offers sustainable waste management, while Infigen Energy (ASX: IFN) owns and operates a range of renewable energy assets. 

An ETF option in this vein is VanEck Global Clean Energy ETF (ASX: CLNE). 

Once again, there is a range of managed funds incorporating sustainable infrastructure investments. These funds offer the opportunity for both a pure focus, or as part of a broader infrastructure strategy, such as those offered by 4D Infrastructure, ClearBridge Investments, and Macquarie.

Idea 2: Portfolio construction

When it comes to high conviction, you might not typically think of a model for portfolio construction – but that’s about to change. After all, construction is the unsung hero for how your portfolio will fare in different markets.

Richard Dinham, head of client solutions and retirement for Fidelity International, recommends a three-element split for a portfolio. Bear in mind this is for a retiree, so if you don’t fit in that bucket, you might not need several years of pre-planned bill payments.

“Cash for two to three years of known future needs, such as bills, car running costs, etc. Then a moderate risk diversified portfolio of ETFs and/or managed funds for taking a measured approach to covering expected expenditure in the medium and longer term, such as car purchases or holidays. Finally, a higher risk portfolio with a greater equity allocation for helping to generate strong returns to allow for inflation. Perhaps high conviction active equity strategies, emerging markets, or some thematic equities,” says Dinham.

Those who aren’t retired might find the risk-targeted bucket approach from Atrium Investments useful.

“The three buckets include preservers which are typically term deposits, cash, government bonds, derivative strategies or option strategies; growth drivers which are more typical growth assets like equities and credit; and then we think about diversifiers where we put things like liquid alternatives, private markets and commodities,” says Tony Edwards, chief investment officer and executive director for Atrium.

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Idea 3: the product

Sometimes the biggest ideas are the most practical.

In this high-conviction pick, Aaron Minney, head of retirement income research for Challenger, points to having a base investment in the form of a lifetime annuity to support you alongside a broader investment.

“A partial allocation to a lifetime annuity (as a defensive allocation) can provide a secure income stream for life. The guaranteed income this provides allows a retiree to retain growth investments which can help to maximise returns and increase the available income to spend over retirement,” says Minney.

Other income-producing products (though different from a lifetime annuity product) for non-retirees might be term deposits and government bonds. These will have their own levels of risk and return for investors to consider.

Idea 4: the asset class

White tips private debt as another high-conviction idea for a retiree portfolio for the next five years.

“Private debt can be quite strong in this type of environment. You’re getting reasonable yield for the amount of risk that you’re taking on,” he says.

Private debt typically uses floating-rate loans, offering investors some level of protection from rising interest rates and inflation. It’s an asset class that Atrium Investments are also favouring as a diversifying investment for the volatility they anticipate in markets.

Why is that interesting? Because Atrium incorporates risk-level targeting at the start of its process rather than at the end, It also classifies this as a diversifier – to offer uncorrelated returns and performance to the other buckets, which helps reduce risk in the portfolio. Atrium incorporates private markets as a whole – so not just the debt side.

“We’ve had strong allocations to liquid alternatives and private markets where we see a more attractive risk reward payoff,” says Edwards.

He also tips it as a space that Atrium are monitoring as an area for future opportunities.

Where can you find private debt?

It’s not that easy for the average investor to access private debt directly which is where using a managed fund specialising in these investments from the likes of Metrics Credit Partners or Qualitas might come in.

So there you have it, four different conviction ideas for risk-sensitive investors. 

What are your high-conviction picks for risk-sensitive investing? Let us know in the comments.