Managing portfolios in 2022 is a very different proposition for financial advisers. After decades of steadily falling and low inflation and interest rates, there has been a cyclical change to rising inflation and interest rates. The reasons for this are complex, but the bottom line is that the confluence of factors causing this regime change will likely persist. Therefore, the change is structural and will endure. You can learn more by watching the latest Lander Report.
The critical issue for investment managers is that managing portfolios in this environment differs vastly from the common methods of recent decades. The volatility of equities is rising, with markets reassessing the valuations of many apparently over-priced stocks. Bonds are very likely to see a long run of low performance. Plus, the effects of high inflation are placing downward pressure on real returns from both safe-haven and growth asset classes.
Future Fund Chairman Peter Costello has been openly critical of many large super funds that have not adapted to the new reality. He believes that the success of the Future Fund, and others, will depend on how effectively managers read the changes and adapt.
So what does this mean for financial advisers?
Fundamentally, the traditional SAA-driven balanced portfolio that uses historical asset class performance to guide future outcomes is not fit for the times. Managing portfolios in a high-interest, high-inflation economy requires a future-focused and diversified approach.
- Today, diversification requires looking beyond a traditional balanced portfolio view of diversification to a broader range of alternative assets. These include private equity; hedge funds; property; and hard assets such as resources, commodities and precious metals.
- Future asset performance. Traditional strategic asset allocation is based on Modern Portfolio Theory, using the historical performance of asset classes to guide likely future outcomes – an approach that is set to fail during periods of regime change in markets. Focusing on the future requires prioritising selective assets over broader asset classes. That is, analysing the likely future performance of assets, considering their current price and potential future value in the context of the macro market.
- Active portfolio management. Active portfolio management using Dynamic Asset Allocation (DAA) is a highly intensive form of portfolio management. Commonly used by institutional investors, such as the Future Fund, it uses the skills of a professional active portfolio manager to dynamically adjust portfolio allocations in real-time according to market conditions, asset pricing and future potential. It combines broader diversification with a future asset performance focus and a real-returns investment philosophy. While DAA is overly time-intensive for most financial advisers to manage themselves, the Dynamic Asset managed account solution provides a plug-and-play way for advisers to take advantage of the approach.
- Focus on client goals. Today’s investors are better shoppers. While many may not fully understand the intricacies of managing money, they have fingertip access to all the information required to assess the value they receive. When there is a focus on the path to accomplishing goals, rather than the vagaries of market performance, the nature of the relationship is more positive and client engagement increases. The adviser’s role is more strategic, based on a deep understanding of their clients’ current situation and future aspirations.
Making it happen
The set of approaches described here is far easier to deploy than you may imagine.
- The Dynamic Asset managed account solution is centred on five actively managed portfolios spanning short, mid and long-term investment horizons. They can be used for retail super and other investments
- Each portfolio has specific target returns and can be blended using the unique Portfolio Construction Tool to match individual client strategies
- It is available as an investment option on platforms such as Hub24 and Mason Stevens
- Using managed accounts means asset allocations can be adjusted in real-time. It dramatically reduces administration for the adviser and client. Furthermore, it maintains the portfolio focus on client goals and takes advantage of the lack of implementation lag common to typical SAA portfolios.
