These aren’t normal times. All asset prices are inflated, and not just by a little bit. Arguably we are living through one of the biggest bubbles in asset prices of all time given the massive government support required to keep the bubble inflated with massively inflated valuations during such lacklustre economic conditions. At the same time, there is an indelible belief in passive and quasi-passive investing.
Advisers need to consider these points carefully and adjust their portfolios accordingly. If they don’t, they risk hitting the rocks with their client portfolios and as a result, their businesses. Advisers need a Plan B.
It is just a matter of time
You don’t need to be a rocket scientist to realise that there is very clearly the need for a different type of portfolio than we have had in the past.
The risk of a massive change in the investment environment is imminent as near-zero bond rates and inflation have been valued into market prices ‘forever’. Yet a vaccine or vaccines, better testing, and changing government policies will significantly influence the market tenor in coming years. Highly credible and previously meaningful forecasts demonstrate that the likely multi-year real return from most mainstream assets is around zero! Risks are much higher than normal, and the chances of multiple repeated crises in the coming months and years are very high.
- Morgan Stanley says the “60/40 portfolio is Doomed”
- Seeking Alpha confidently declared “The 60/40 portfolio is dead”
- Forbes Magazine declared there are “Problems with the 60/40 Portfolio”
- Bloomberg says that if “60/40 portfolios keep working, then democracy is dead” all voicing their concerns over likely future returns and poor SAA portfolio outcomes.
- Even ASIC is getting into the game by issuing a warning for mum and dad investors that all is not well in the investment world.
- And, the Future Fund is increasing its cash allocations
The current starting point is probably the worst possible combination for most long-term investors relying upon traditional passive or quasi-passive exposures to cash, bonds, property and equities to make them real gains. Yet, many advisers and investment managers continue to invest in the same way. They continue to build portfolios as if we were in the 1980s and 1990s when interest rates were much higher, and equity return prospects were very strong because that is what has always been done. Worse still, many advisers recognise these challenges and are doing nothing about it because they are reluctant to change or unsure about what else to do.
The time to change is now
The rising tide which has lifted all asset prices and investment managers and advisers, is receding fast. Advisers need to consider what happens when we move out of “goldilocks” conditions and into a period of stagflation, inflation or deflation, and consider what that means for their portfolios (hint – it’s not good!). Bonds could suffer greatly in the case of rising inflation.
Over the last couple of years, we can already see that mainstream results from passive investing are failing clients. We see most portfolios experiencing big drawdowns, little downside protection, and very low to no overall return.
Advisers need to have the courage to recognise that things have changed and adjust their approach to markets for their clients' benefit. Without change, more of the same results – or worse - should be expected.
Now is the time for change, not after passive investing has destroyed your clients’ capital – and your business alongside it. Astute advisers are moving to get ahead of the curve and avoid another CFG like fallout for clients and their advice businesses.
What can Advisers do?
Dr Jerome Lander, portfolio manager at Dynamic Asset, summed it up succinctly in his most recent webinar “The New Reality” where he says that:
- Real returns from traditional asset classes are likely to be around zero over the coming years, with significantly increased volatility and further crises
- Bonds are in a bubble and could detract meaningfully from supposedly defensive portfolios
- Equity markets are priced for a perfect world and ignoring significant risks and economic reality
- The static Strategic Asset Allocation model is set to fail clients and advisers
- A more dynamic, actively managed and forward-looking approach is needed to avoid mediocre or disastrous business and client outcomes
Advisers considering their Plan B need to be well-researched and thoughtfully different if they are to achieve an outcome that is different from the traditional passive SAA portfolio whereby they improve the likelihood of achieving investment outcomes acceptable to their clients.
Investment portfolios will need to be more selective when choosing investments, prioritising value-adding exposures, being more dynamic and more active with risk management to avoid large downside risks.
The challenge
Many advisers recognise that they simply don’t have the time, training or resources to do much of this, let alone all of it. To be thoughtfully different, rather than just track market indices - and to do it properly - you need the appropriate resources, skills, experience and time. To develop and pay for the appropriate resources, you need a scale that is beyond most IFA’s.
Advice firms also need to execute dynamically and efficiently using structures and technology to deliver these services at scale across their business. That is, it is not only a portfolio solution that is needed; advice firms need a whole-of-business solution that can integrate with their existing business to help manage costs and run a profitable operation.
The good news
For astute, forward-thinking advisers that recognise this new reality and want to adapt to meet their clients' needs, there are ways to mitigate these risks. Even thrive in the new environment and, in doing so, distinguish themselves from the rest of the market.
In his webinar, Dr Lander provides advisers with the blueprint. He says that portfolio mandates need to be designed to meet specific goals, not static asset allocations, be they; cashflow, risk management or return-seeking. Portfolios need to be able to use a broad asset allocation range and access different assets than is found on most restricted Approved Product Lists (APL’s).
A pragmatic option is for advice firms is to use specialised portfolio management services that deliver solutions that account for the new reality.
Plan B
Dynamic Asset’s client-orientated portfolio designs combined with market-leading execution solutions and portfolio management services are now available for advice firms to use in their businesses. Dynamic Asset is a simple end-to-end turn-key business solution using the framework, systems and processes that have been successfully used by advice firms for over five years. Their whole of business solution covering Wealth and Retail super provides a range of goals based investment portfolios designed to meet different client needs. Furthermore, to do so across changing market conditions and deliver outcomes that will help advisers and their clients thrive in the new reality.
The solution leverages ten years of research and development by the team at Dynamic together with the portfolio management success Dr Lander has been delivering, with his flagship Wealth Builder portfolio delivering market-leading returns over the last 1, 3 and 5 years.
Implementation of this approach is straightforward as it has been built for clients by advisers to use in an advice business. By integrating the infrastructure, client orientated portfolio design and dynamically managed portfolios of Dynamic Asset into an advice business it builds on the existing strengths of advisers, helping them not only survive but thrive.
If advisers haven’t already been giving this some thought, it would be prudent for them to think through these issues very carefully and have a Plan B ready to go.
To learn more about how the Dynamic Asset adviser solution can work for your business, contact us.
