Well-balanced portfolios of the future - Raconteur

ended 01. December 2021

A journalist at Raconteur is asking what a well-balanced portfolio will look like in several years’ time. Her questions are:

Are there other low-risk investment options that could fill at least part of the space occupied by bonds?
How are managers diversifying their clients’ portfolios to take full advantage of evolving asset markets?
What role will individual asset holders’ preferences play in developing a balanced portfolio?

If you're a Premium user, your response will be edited by an experienced journalist and appear higher up the viewsWire. Keep your responses short and sweet — soundbites, not War and Peace!

5 responses from the Newspage community

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Adam Walkom

Co-founder at Permanent Wealth Partners

At PWP, we subscribe to the view that the traditional 60/40 Balanced portfolio is dead. In a low and rising interest rate world, having a significant portion of your portfolio in an asset class that is almost guaranteed to lose money is not diversification - it's stupid. The other aspect about 60/40 was that it became too easy for the adviser who was able to bundle the whole client into a Balanced portfolio because they ticked boxes on the risk questionnaire a certain way. Good for the regulator, bad for the client. So we do things a little differently. Firstly we conduct a critical time-based assessment on the clients needs for the funds. If a client probably won't need the funds for 20+years, then they would be crazy to hold anything but 100% equities. For shorter time-based needs - say 5 years or so - then we look to create an "All Weather" using a spread of different assets for the non-equity portion like Property or REITs, Gold, Private Equity, perhaps some inflation-linked bonds. Constructing a portfolio is an art form as it is not about trying to predict the future, moreover it is about creating a diversified mix of assets that will perform well whatever the future situation it is presented with. Once our clients understand this is how we work, they immediately recognise that it is superior to a standard "Balanced" 60/40 portfolio.

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Joshua Gerstler

Chartered Financial Planner / Owner at The Orchard Practice

"I believe that the best place for long term investment growth is equities - owning the great businesses of the world. If you were looking for alternative to bonds, you might look at Peer to Peer lending. It operates in a similar manner, that being you lend money to the company in exchange for an interest payment. However, it is not as heavily regulated. The majority of our clients prefer to delegate the investment selection to us and do not express particular preferences (apart from long-term growth!). There are some who do take an active interest in like to select certain funds, sectors etc. Where this is the case, unless we think it is a bad decision, we will facilitate their wishes as much as possible."

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Danielle Arnold

Head of Paraplanning at Bespoke Wealth

Whilst the focus to long-term growth will always be on equities, it’s important to have some lower risk alternatives to act as a defence against equities when markets are volatile. Some low-risk alternatives to bonds could potentially include high-yield savings accounts, dividend-paying stocks, certificates of deposit and/or treasury bills. At Bespoke, we only recommend investment strategies that provide an extremely high level of diversification and control of volatility. These include a large variety of asset classes, different investment managers as well as different geographical areas. Due to the uncertainty faced as a result of the pandemic, our post Brexit trading relationship with the EU and global political instability, we believe an actively managed portfolio, where investment managers can follow distinct themes or trends with their investment approach to take advantage of evolving markets, will be better placed to deal with this uncertainty than a passive portfolio (which will invest indiscriminately across an entire index, such as the FTSE 100). We are seeing a huge number of clients now heavily focussed on sustainability and wanting to invest with ESG themes (potentially a result of COP26 or ‘the David Attenborough effect’). But naturally, what is important to one client is not important to another so there is no ‘one size fits all’ approach to sustainable investing and our job as the adviser is to ensure investment managers are not ‘greenwashing’ their funds. We therefore carry out extensive due diligence before making any recommendations. We expect over the coming years that a balanced portfolio will include a variety of sustainable themes targeting a variety of worldwide sectors, if not already doing so. These sectors include renewable energy, food and agriculture, water and sanitation, real estate and infrastructure, as well as healthcare, finance and technological innovation etc. This is something we are encouraging our clients to do and passionately combatting the stigma that responsible investing equals lower returns, because our experience shows otherwise.

Noel Watson

IFA and Retirement planning specialist at Pyrford Financial Planning

Are there other low-risk investment options that could fill at least part of the space occupied by bonds? Many of the potential alternatives suffer from issues such as transparency, high fees, illiquidity and not enough of a track record. The question to ask is "what role do I intend for bonds to fulfil in a portfolio and why they might no longer deliver that going forwards". Many use bonds to dampen down overall portfolio volatility in turbulent markets - do bonds no longer deliver that? How are managers diversifying their clients’ portfolios to take full advantage of evolving asset markets? The ones I am aware of stick with what has always worked. What role will individual asset holders’ preferences play in developing a balanced portfolio? Depends what you mean by preferences - most people in retirement want a portfolio that they are happy to stick with during turbulent markets and give them the best chance of their money not running out further down the road. Bonds tend to help with the former, equities with the latter.

Nick Harrington

Associate Investment Analyst at Investment Quorum

• Are there other low-risk investment options that could fill at least part of the space occupied by bonds? Real assets are a low-risk investment option that could fill the space occupied by bonds. These assets have a low correlation with both equity and bond markets, exhibiting diverse underlying revenue streams which can include infrastructure, healthcare, transport projects and even music royalties. Moreover, real assets have historically offered more inflation protection, particularly over a full market cycle. In the case of core infrastructure, most of the cash flows are contractual and/or directly linked to inflation, providing a useful hedge against a backdrop of rising prices. Many real asset funds also pay an attractive income to clients, which could be an added positive in an environment of historically low bond yields. • How are managers diversifying their clients’ portfolios to take full advantage of evolving asset markets? We believe the best way to diversify client portfolios so as to take advantage of evolving asset markets is to invest in innovation. This involves focusing on the most powerful, long-term structural trends that are set to reshape the world. We have been forming views on how developments in areas such as robotics, automation and the energy transition will affect certain countries and global sectors and are determining where risk and value will be concentrated. Over the past couple of decades, the bursting of the technology bubble, the Global Financial Crisis, the Eurozone Crisis, Brexit and most recently the pandemic have catalysed wide-ranging change in how we do business and how we enjoy our leisure time. Recent technological developments and scientific breakthroughs, together with increased awareness of social and environmental issues have created a plethora of exciting themes and innovation ideas that we can now leverage when constructing portfolios. • What role will individual asset holders’ preferences play in developing a balanced portfolio? COP26 has succeeded in raising awareness of the need for climate action – not just among governments and companies, but from investors as well. We believe individual asset holders’ preferences in relation to sustainable investing will be crucial in developing a balanced portfolio in the years to come. Whether it be through investing in global equities or green bonds, asset holders’ will likely demand robust ESG procedures – such as more thorough quantitative screens, increased disclosures or climate scoring targets – to ensure that managers are not ‘greenwashing’ their portfolios. We believe thorough qualitative and quantitative due diligence, (sending questionnaires to managers, leveraging third-party emissions data, comparing the overall green revenues for funds, etc.) will be vital in helping us meet clients’ growing desire for us to enhance the ESG credentials of their balanced portfolios.