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New approach to portfolio construction required, say UK financial advisers

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A majority of UK Financial Advisers have doubts about the merits of traditional portfolio construction, in which 60% of assets are allocated to equities and 40% of assets are allocated to fixed income products, according to a study released by Natixis Global Asset Management (NGAM).

Against the backdrop of volatile markets, seven in ten advisers (71%) say the majority of their clients are conflicted between pursuing return and protecting capital. Advisers, recognising their clients’ anxiety and the need for more durable portfolios, want to explore new approaches towards portfolio construction. The results also highlight investors’ concerns about political and economic issues.

The study, released by the NGAM Durable Portfolio Construction Research Center, was based on a survey of 178 U.K.-based financial advisers and investment professionals which collectively administer more than GBP58 billion in assets on behalf of clients with an average investment portfolio of more than GBP392,000.
Key findings include:

Some 52% of advisers say that a 60/40 portfolio is no longer the best way to pursue returns and manage investment risk for most investors; compared to only 8% who believe it is;

Nearly half (46%) of advisers say there is a need to replace traditional diversification and portfolio construction techniques with new methods;

For investors with a moderate risk tolerance, 31% of advisers say a 60/40 portfolio is not an appropriate technique; compared to only 18% who say it is.

As a result of the tumultuous markets following the 2008 financial crisis, individual investors are talking more with their advisers and building stronger relationships, according to the study.

Two-thirds of advisers (66%) report that the majority of their clients have been more interested in discussing risk over the past year.

Two of five respondents (40%) say that, because of market volatility, they now oversee assets their clients had previously held elsewhere; only 12% say they do not and 48% neither agreed nor disagreed.

About 82% of financial professionals say they have talked with their clients about alternative investments, a category that covers assets such as hedge funds, commodities and managed futures. And in spite of their general conservatism about investing, clients do not appear to be as apprehensive about alternatives as might be expected.

Some 47% of advisers say investors they work with are not concerned about the risk of alternative investments, compared with 53% who do worry about the risk.

A total of 46% say individual clients are not concerned about the perceived risks of unfamiliar investment vehicles, while 54% are concerned.

“Investors have formed stronger relationships with their financial advisers because of the market volatility in the last three years as they try to balance risk and reward, manage volatility and build more durable portfolios in difficult markets,” says John T Hailer, president and chief executive officer, Natixis Global Asset Management – The Americas & Asia. “Advisers in return are looking at broader portfolio options such as alternative investment strategies to meet more complex needs.”

Client Concern about Political and Economic Issues Means Portfolio Construction Challenges Here to Stay
Advisers say their individual clients are concerned about the effects national and international events will have on their investments.

Four of five advisers (80%) say clients are concerned about a slowdown in global economic growth; 20% say clients are not concerned.

A similar portion of respondents (78%) says investors are concerned about the European debt crisis, while 22% say clients are not concerned about the issue.

83% of advisers say clients are worried about higher taxes on earned income, compared with 17% who say investors are not concerned.

Three-quarters of advisers (76%) say investors are concerned about the continuing decline in the value of real estate they own; 24% say clients are not concerned.

“Amidst ongoing worries about the macro environment it is clear UK Financial Advisers have an increasingly important role in helping clients to build truly diversified portfolios to meet their long term objectives,” says Ed Farrington (pictured), NGAM’s managing director of Global Key Accounts. “Investors face the combined challenge of low interest rates, volatile markets and high correlations, and asset managers must respond with strategies that seek new sources of income while at the same time controlling volatility and preserving capital.”

 

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