So much emphasis on ensuring people don’t take on too much investment risk could be creating a different problem, argues David Coombs, head of multi-asset investments at Rathbones.
Case study: dear old dad
It’s my dad’s 80th birthday this week. He retired back in 1981 and has lived off his relatively modest investment portfolio ever since, some 38 years.
The first year, his portfolio was managed by the private client department of the bank he had been with since he first opened a chequing account. They shall remain nameless. He sacked them after 12 months due to poor performance!
Thereafter he managed his own money (with the help of Investors Chronicle) until five years ago when he felt that, given I had then racked up 30 years in the business, he might trust me to take a look. Also, there was the added bonus that my advice came free …
You see, my dad hates paying fees, which is why he has navigated the past four decades with no advice at all. He has never stumped up for an investment self-help book either!
At bottom, my dad is nowhere near your idea of a client. So why am I telling you this? Well I find his investment approach at once admirable and enlightening for all us. And it could teach us a few lessons about cutting to the heart of exactly what your clients need and how to make it happen for them.
His portfolio has been invested purely in equities the whole time. With the exception of a few overseas investment trusts, my dad’s portfolio has, is and will continue to be dominated by blue-chip dividend-paying stocks in the UK.
There have been many bouts of volatility since the early eighties: the ’87 crash, Dotcom bubble and global financial crisis to name just a few. Through all that my old dad was a perma-bull. Sure, he experienced some anxiety when things got spicy but he stuck to his guns. Crucially, he focused on what was really important to his situation: as a pensioner, he needed stable income to ensure he didn’t have to run down his capital. The value of his portfolio could wax or wane, as long as the income was there for him to live the life he wanted.
His unorthodox portfolio has more than kept pace with inflation and the income is higher now than at any time in the past. It won’t surprise you to hear he didn’t give a toss about benchmarks or Sharpe ratios! The portfolio today remains 100% invested in equities.
This raises some big questions. Does our industry overly complicate investing? Has an emphasis on short-term volatility and capacity for loss led to savers being under-risked? Should we put more emphasis on time horizon and income sustainability when helping people meet their goals? Should we also be asking clients whether they are happy not taking risk if it means there’s a significant chance they won’t have the money to live off further down the line? As always, it’s how you frame the question.
The multi-asset industry, whose significant growth over the past 10 years was driven by greater risk aversion, needs to reflect on whether their investment strategies are still relevant.
As for the multi-asset portfolios that Will and I manage, we have found our strategies are changing dramatically in an uncharted world of low or negative interest rates and the resurgence of old threats such as protectionism and populism. We have jettisoned a number of asset classes from our strategies, as we believe they no longer diversify our risks or offer returns commensurate with the perils they bring.
Property is at zero. Corporate bonds, other than a few special situations and short dated paper, no longer feature. Nor do long/short funds or commodity trading advisers (CTAs). Infrastructure is at zip. Zilch alternative income strategies, such as aircraft leasing or peer-to-peer lending.
We focus on global stocks demonstrating high returns on equity and predictable growth predicated on structural tailwinds such as digital technology or changing consumer behaviour. Our fixed income portfolio is dominated by short-duration sovereign bonds from the UK, US, Japan, Australia and, most recently, Singapore. Our ‘alternatives’ are commodities and put options.
The reality is any positive returns we make are likely to be predominantly from our equities. The other assets may offer some contribution, but they will almost certainly dampen volatility in most stressed markets. That’s why they are there.
But for anyone who, like my Dad, can cope with volatility (even if it’s uncomfortable at times) then – in my opinion – right now equities are the only game in town worthy of capital for the foreseeable future. If you can stomach large fluctuations in your portfolio, I think buying low-return, low-volatility risk assets is a waste of capital right now. In fact, low volatility may be hiding high drawdowns due to poor liquidity.
So yes, risk profiles are important. But so are returns. And in a low-rate world, this fact will be come all the more stark. We need to make sure clients’ time horizons get more attention, not just anxiety, and they should figure strongly in deciding which of our funds is most appropriate for your clients.
Our job in the investment industry should be to challenge and guide, not simply acquiesce to win the business. The latter will lead to disappointment, anger and ultimately lost business.