FS Roundtable: Striking the perfect balance

The current climate is pushing the importance of asset allocation to the forefront of building robust portfolios, prompting investment experts to think outside the box of traditional assets. Karren Vergara writes.

The importance of making the right, timely and efficient asset allocation decisions amid the current market conditions have never been more crucial.

Given the maelstrom of geopolitical tensions, mounting global debt and ultra-low interest rates, financial advisers - from small boutiques to large private banks alike - are being propelled to find the best investment opportunities for clients that will not only keep capital intact, but generate stable and reliable income.

At a roundtable recently hosted by State Street Global Advisors - SPDR ETFs, industry experts discussed the most dynamic ways to shield client portfolios from market volatility and turbulence, thinking outside the box of the traditional power players of bonds and equities.

That a market correction is inevitable was a common sentiment among participants. The extent of its severity and when it will hit however was anyone's guess.

SSGA head of the investment solutions group portfolio management, Americas and Asia (ex Japan) Michael Martel summed up the current environment at play: "I don't know of any central banks that have a mandate to stabilise capital markets, but they all seem to be doing it right now."

"The unintended or intended consequence is that bond yields have cratered around the world," he says.

The speed at which platforms can execute and facilitate asset allocation changes at the drop of a hat - in the event of another crisis - was also hotly debated.

Also in attendance from SSGA were senior portfolio manager, investment solutions group Benjamin Regnat; and head of SPDR ETFs, Australia and Singapore Meaghan Victor.

The group also comprised: Viridian Advisory chief investment officer Piers Bolger; Morgan Stanley vice president, head of product Shaun Bornstein; Credit Suisse executive director of investment consulting Stephen Cabot; Koda Capital head of research Jason Coggins; Lonsec Research general manager of investment consulting Lukasz de Pourbaix; Rainmaker head of investment research John Dyall; IOOF Holdings head of research and retirement income Matthew Olsen; Rainmaker managing director Chris Page; Implemented Portfolios chief investment officer Jonathan Reilly; Asset Builder Financial Services executive director Christian Schween; Crestone Wealth Management senior portfolio strategist Stan Shamu; and Banyan Tree Investment Group director Chhai Ung.

Searching for yield

One challenge facing financial advisers, Martel says, is building income portfolios for clients retiring or are in retirement when the 10-year bond is yielding as low as 1%.

In the search for yield, Martel is seeing a shift in the amount of risk retirees are adopting, from low-volatility bonds to high-yielding bonds, high dividend-paying equities and even emerging market opportunities that can generate 4-5% returns.

"It changes the maths and makes our job challenging," he says. "You cannot just build an income portfolio anymore - capital appreciation has to be a part of it."

Martel says Australia sits in an enviable position compared to some parts of Europe and Asia because there is a healthy demand for bonds now and going forward.

In Australia, Martel notes a large percentage of retirees have professional investment management - an observation which he commends.

Yields might be low but bonds are a defensive mechanism and play an important role in portfolios, he says. But the key is taking a longer-term view.

Martel says this can be a tough conversation with clients, especially the older cohort who are used to the higher-yielding bonds of the past.

Bolger says in a total return environment, bonds have delivered exceptional returns in the last 12 months, particularly from a duration position.

Boutique advisory firm Asset Builder Financial Services adopts a prudent outlook on asset allocation in light of the current economic climate.

Some clients, who were once accumulators are now in retirement mode, have a longstanding relationship with the firm that spans more than 30 years.

They tend to be more conservative when it comes to asset allocation, Schween says. "Because the world is changing rapidly, we have taken a conservative approach to investment with them."

Amid the share market volatility, spiraling global debt, interest rate worries and difficulty in generating yield, the firm cut its 80% equity exposure to 40% and sits firmly in an asset allocation dominated by fixed interest.

Shifting away from equities formulates part of the Melbourne-based firm's long-term strategy to cater to clients who are also long-term focused.

Australian banks and hybrids are attractive given the nature of the franking credit system, Schween says, noting that a small portion is allocated to gold as a hedge.

Alternative solutions

In pivoting away from fixed interest and toward alternatives, the question becomes if this relatively non-traditional asset class is suitable or fit for purpose for retail clients.

The definition for alternatives can stretch a "mile wide", Martel says.

In the US for example, alternatives are disaggregating from being known as 'hedge funds,' and its definition is broadening to include private equity and infrastructure assets, he explains.

Credit Suisse executive director of investment consulting Stephen Cabot agrees that alternatives is a broad area.

The European firm, which services wholesale clients locally and has a global investment committee based in Switzerland and Australia, has a 20% allocation to alternatives that complements a core satellite approach.

The core investments remain in equity and fixed income, while the satellite aspect allows for "nimbleness" or room for new ideas such as alternatives in the form of private equity, he says.

Alternatives are "big bite-sized" investments that span over a 10-year time horizon, which in turn requires guiding clients through an education process to ensure they are comfortable with that timeframe.

It's also a matter of gaining their trust that the adviser will be around after 10 years, so spending that time with them is important, he adds.

In Australia, Morgan Stanley's client base is evenly split among retail and wholesale clients. According to Bornstein, the global firm is active in the alternatives and infrastructure space with sophisticated wholesale clients.

In terms of unlisted assets, he says there are good opportunities available in infrastructure, bespoke deals and monopoly-type structures with regulated income or assets that can weather through the cycle.

For retail clients on the other hand, who have mostly moved into capital preservation mode, Bornstein doesn't think they are quite comfortable with alternatives as yet and finds the education piece with the retail segment typically involves bringing in their return expectations in line.

Seeing that a gap exists between alternatives and retail clients, Martel believes ETFs have a potential role to play to meet this need.

The next evolution for ETFs, he says, is in the alternatives space: bringing non-traditional exposure to the retail market at the right price point together with liquidity.

Keeping pace

How platforms have not kept pace with the changing dynamics of financial services was a burning question among the attendees.

In Coggins' experience, the limitation of platforms can be quite high.

"About 40% to 60% of the products or strategies we use are non-platform friendly and require manual intervention on our behalf," he says of the Sydney-based boutique private wealth firm.

In overcoming such barriers, Koda made a large investment in its back office "to try and replicate what we think a platform should be able to do," Coggins adds.

Viridian's Bolger observes many platforms are overstretching their value proposition.

"I don't think platforms have evolved as quickly as the investment and advisory environment, and with the expectations of what advisers want. That is a real challenge for the industry," he points out.

Victor says in developing model portfolios, SSGA SPDR ETFs undertook a process it calls customer centred design, otherwise known as CCD testing. This involved speaking to financial advisers, who expressed they demand for objective-based portfolios.

When it came to engaging broadly with the platforms about the new products, Victor says one frequently asked question came to light: How do the portfolios fit within the standard financial planning process?

What typically happens after the fact find is complete, she says, is that the client is pigeonholed into conservative, growth or high growth option. Because of this limitation on platforms, SSGA had to customise portfolios to meet this need.

Reilly says: "We run model portfolios that range from conservative through to growth, but we allow advisers to interact with us to provide guidance on how to tailor those models for individual client circumstances."

At the onset of the Global Financial Crisis platforms underwent the ultimate stress test.

Given the volatility and spike in trading volume, numerous platforms weren't able to cope, proving to be "slow and cumbersome" and unable to process information fast enough, Schween recalls. Many platform providers at the time were still reliant on manual signatures and paper work.

If a deep market correction does materialise, attendees deliberated how efficiently platforms could execute asset allocation instructions these days.

Bolger says the speed at which asset allocation is altered seems to be where the real advantage is - whether or not a market correction occurs.

This can be achieved by having a consistent, singular investment framework that allows advisers to execute across the entirety of their books efficiently and be able to do so with minimal lag, he says. "That's an element that gets lost in the advice world."

Read more: SPDR ETFsAsset Builder Financial ServicesCredit SuisseMorgan StanleyRainmakerStephen CabotBanyan Tree Investment GroupBenjamin RegnatChhai UngChristian SchweenCrestone Wealth ManagementGlobal Financial CrisisIOOF HoldingsJason CogginsJohn DyallJonathan ReillyKoda CapitalLonsec ResearchMatthew OlsenMeaghan VictorMichael MartelPiers BolgerShaun BornsteinSSGA SPDRStan ShamuState Street Global AdvisorsViridian Advisory
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