The changed economic and investing conditions have provided cause for many advisers to re-examine their investment philosophy.
An investment philosophy is based on the beliefs that guide investment decision-making. In times of market upheaval and uncertainty, your investment philosophy enables you to control emotions, shut out the noise, and focus on the things that matter. Your investment philosophy keeps you focused.
Your investment philosophy is also central to your business proposition and purpose. When articulating the why of their investments clearly, your clients can better understand them, which helps in times of stress.
What approach will work best going forward?
Strategic Asset allocation assumes that asset classes will provide the same risk-return performance in the future as they have over the past 10 to 20 years. It models investment expectations based on outcomes almost no one expects to be true over the next 5-10 years. We always say that past performance does not indicate future performance, but that's the premise used in SAA modelling.
In contrast, Dynamic Asset Allocation actively manages portfolios to achieve pre-defined risk-return outcomes. The approach is focused on the likely future performance of specific assets rather than asset classes and usually contains a much broader mix of assets, including alternatives, commodities and precious metals.
In today's turbulent economic and investment environment, Dynamic Asset Allocation is a risk-managed portfolio solution built for the times. By focusing on specific risk and return targets over timeframes, volatility and risk and return are managed according to portfolio investment net mandates.
Looking at the table below, you can compare how each works and think through what you believe is most appropriate for your clients.
| Strategic Asset Allocation | Dynamic Asset Allocation |
| Risk profiling is the most appropriate way to determine an investment strategy. | Investors' needs and goals are the most appropriate way to determine an investment strategy. Investors have numerous goals, so no one strategy or profile will suit all their needs. |
| Markets are always efficient and repeatable. Modern Portfolio Theory can be used to build optimal portfolios based on historical data. | The world is continually changing, so a flexible and broad-ranging asset allocation can best derive value or limit capital losses. |
| Markets will always revert to a mean average, suggesting there is little value in managing asset allocation. | Markets are not always efficient, with risk-reward opportunities arising from time-to-time. |
| History is the best guide to future outcomes. | Forward-looking estimates and projections are more relevant than historical data. |
| Investors are always adequately rewarded for risk, so a long-term strategic (or static) asset allocation is best. | Protecting capital is of paramount importance. |
| Risk means the volatility of capital. | Risk means the probability of not meeting an investor's goals. |
Client needs at the centre
The central focus of changes to compliance regulations over recent years has been to increase the substance of 'Client Best Interest' obligations. That is, to require that the advisers provide investment strategies and products best suited to every investor's best interests.
The traditional approach emphasises the investor's risk tolerance or appetite over achieving specific goals or outcomes. Over time, this measure is seen to be necessary but insufficient.
The evolution of goals-based advice has brought a more comprehensive understanding of an investor client's circumstances and financial goals into frame. Because only when an investor's future goals are known and referenced against their current circumstances can a realistic investment strategy be developed.
But still, understanding client goals, circumstances, and advice is insufficient if the investment solution doesn't specifically target the investor's goals. It would be best if you had an investment solution that is fit for purpose in achieving specific outcomes. That, in essence, is the difference in philosophy between Strategic Asset Allocation and Dynamic Asset Allocation.
How to deliver a DAA approach efficiently
Dynamic Asset is a managed account solution that employs DAA-managed portfolios. Built by advisers for advisers, it was born from the need that advisers have to offer genuinely client-centric investment management. A range of portfolios provides complete investor solutions for short, medium and long-term goals. The portfolios are suitable for retail super and non-super investments. Cleverly, advisers can use the Dynamic Asset Portfolio Contraction Tool to blend portfolios to achieve specific client goals.
The Dynamic Asset portfolios are available on leading platforms such as HUB24 and Mason Stevens.
Contact us to learn more about how Dynamic Asset can help your advice business to meet the challenges of the times and the needs of today's investors.
