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What opportunities investors should look for in 2021

Allianz Investment Management’s Johan Grahn joined Yahoo Finance Live to break down what opportunities investors may have missed out on in 2020 due to the pandemic.

Video Transcript

SIBILE MARCELLUS: Now, clearly the pandemic has driven a lot of market gains, but there are so many options out there. So what exactly is the best way to position yourselves to take advantage of all the opportunities out there? To talk some more about this, we’re now going to be joined by Johan Grahn. He is head of the ETF strategy at Allianz Investment Management. Johan, it’s great to have you on.

JOHAN GRAHN: Yeah, a pleasure to be here. Thank you. Happy New Year’s.

SIBILE MARCELLUS: So what are some opportunities– let’s start here– that investors might have missed out on if they were cautious because of all the volatility in the markets because of the pandemic?

JOHAN GRAHN: Yeah, sure. I mean, that’s a pretty classic behavioral issue, right? When you have a big dropoff in– especially if you start cashing in, and you take money off the sidelines, and you feel like you’re in a safe spot, right? And that might be true for as long as the market’s coming down. But then, that risk balance turns into an opportunity cost, and that’s where a lot of investors get burned, frankly.

So the question really is, what do you do to make sure you stay invested? And the question is, what do you actually own when you are invested? And those are some of the big questions that we battle with.

ADAM SHAPIRO: So how do you answer that question for your clients? Because we’re looking at a record close for the year on the indices, and a lot of people want to protect their assets with pandemic uncertainty, as you point out. But many of us rely on people like you to say, OK, here are your options. What would those be?

JOHAN GRAHN: Yeah, I know. I think it’s a great question. Thank you. It used to be a lot easier to answer those questions. Traditionally, you’ve had investors, you know, when they become more conservative, and what we focused mostly on in terms of investor base, right, you have retirees. You have pre-retirees and people getting into retirement. That’s typically where you tend to see some of the more conservative investing natures come into play.

And a lot of times, what you see is that you move money from equities to fixed income, and that’s been the going rate, so to speak, no pun intended, for many, many years. That it was the case 20 years ago. It was an easy decision. That is not so much the case anymore. As you know, you have interest rates at record lows. You know, they plummeted from 200 basis points down to south of 100. We’re now at about 90. And you don’t get a whole lot of juice out of that rate market anymore. So that decision has faded away over the past several years.

You’ve also seen the way that investors have been combating that has been to further diversify their portfolios. So now, you’re looking at adding some of your investments into real estate and gold and high yield and other types of investors. You had the Yale model to come into play several years ago, and you’re extending to hedge funds and private equity and so on and so forth.

But no matter how you slice it, if you want to get to participate in the equity markets and get some returns, you can’t really find it in the fixed income space. So you get closer and closer to equity-like investments. And now, you’re adding risk back to your portfolio when you’re not looking for it.

And frankly, what we’ve seen– we just released a study just a few weeks ago– it’s really showing that 60%, give or take 60% of investors, admit that they’re underinvested. So to answer your question about what do you do, well, we at the Allianz, right, we’ve been managing risk for many, many years, for decades here out of Minneapolis. It’s what we do. And what we’ve done as of late is break that down and provide some of that investment capabilities into a structured fashion in an ETF. And that is, very simply put, the way for you to participate in the equity market without stretching out on the yield curve and try to look for asset diversification elsewhere.

You can participate on the upside, and you still have a buffer against the downside to the tune of 10% or 20%. So it’s a really elegant way to actually get that exposure in a simple fashion.

SIBILE MARCELLUS: And you mentioned that you expect above average returns in the second half of 2021. So how should investors position themselves to really be able to take full advantage of that?

JOHAN GRAHN: Sure. And when we say that, that’s the base case, right? And you’ve got to keep in mind, there’s a lot of big movements behind all this, right? You have this perplexed market, where it’s really a bit of a headshaker at times. But I think you’ve covered that to a great extent. You have monetary policies. You have fiscal policies, you know, that are really pushing the economy forward. You also have a whole bunch of other stimuli, like the vaccine is rolling out and pluses and minuses around all of this, right?

But at the end of the day, if you suspect that you will have something happening in the second half of the year, one way to participate, again, is to have like a structured approach to it. It’s easy enough to say you can invest in things like smart beta ETFs, or you can invest in minimal volatility ETFs. You always have to have a balance on the risk side. Those types of instruments will work in some places and work out for some investors.

The way we look at this– the more safety you can build into how you’re investing, the more comfortable you can be with how you’re investing your money, the better off you’ll be. You can set the expectations, and you can know what to expect before you put your money to work. And that’s where we think the beauty is. That has traditionally from Allianz come in the form of annuities and still does– fixed-indexed annuities and variable annuities, indexed variable annuities. And now, we have repackaged some of that expertise into this ETF wrapper that can really give this to a much broader slew of investors.

SIBILE MARCELLUS: I agree with you. There’s beauty in setting the right expectations. Johan Grahn, head of ETF strategy at Allianz Investment Management. Thanks so much.

JOHAN GRAHN: You bet. Thank you.

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