Our monthly newsletters are inspired by the ongoing conversations with our clients, industry conferences, and other white papers & articles. For instance, our July 2012 Newsletter “Trends in Portfolio Construction” was created following our discussions over this article on InvestmentNews.com.
The article --- which may require registration to read --- gives the results of a survey of financial advisers. The survey suggests financial advisers question the benefit of long-term strategic asset allocation models (say, a 60% Equity /40% Bond mix). The article also suggests that financial advisers are shaken by the ongoing market volatility and question the value of buy-and-hold investment strategies.
Given the survey, F.A.s must instead favor active management and the associated problems including higher fees, higher tracking error, investment manager risk, etc.. At Westminster Consulting, we’ve been receptive to strategic models which include alternatives, global equities, real estate, or active management to diversify multiple types of risk (e.g. all-beta risk, unfunded liability risk, interest-rate risk, and inflation-risk). It has been a challenging decade and the classic approach of Modern Portfolio Theory is flexible enough for improvement. However, there is a perfectly solid defense of 60%/40% portfolios --- given reasonable diversification and automatic rebalancing features. In our “Trends of Portfolio Construction” newsletter, we tried to fairly assess the costs and benefits to the different portfolio construction techniques.
However, the survey suggests a repeat of 2008 era complaint --- asset allocation models didn’t always protect a portfolio in every market environment. To us, the survey suggests an unrealistically high bar for satisfaction. We appreciate that financial advisers, many of whom are compensated based on assets under management and performance, were unprepared for the disappointment. The basics of modern portfolio theory (e.g. diversification) may be required for optimal outcomes, but they were never intended to guarantee a positive outcome.