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Investment View: Wealth of tactics

I have often referred to the thankless task of being an investment manager.

Any mistakes are there for all to see, calculated to the nearest penny. What should financial advisers do when it comes to selecting managers or establishing an investment strategy for clients?

The recent bear market changed popular thinking. From adopting a heavily overweight position in equities, many portfolio strategists came to recognise that diversification was important when volatility appeared to be on the increase. But as tactical asset allocation techniques started to take hold, volatility fell away. The advance in the value of a range of assets made it easy to believe that money could be made in a variety of portfolio scenarios.

It is difficult to argue against broad asset diversification but even here there are dangers. The way in which bond yields have been driven down by demand makes them look particularly expensive for those who do not need to be invested in that area. The proliferation of property investments aimed at private individuals has encouraged the creation of portfolios that are potentially unbalanced.

Meanwhile, the traditional approach of selecting individual shares from which to construct portfolios is being squeezed as market inefficiencies are ironed out and the amount of research conducted on major companies ensures that any news receives an immediate reaction. It can be difficult to see where the generalist manager can add value.

Only in areas where inefficiencies exist do there appear opportunities to beat the system. But dangers lurk. Smaller companies are an example of where research is limited and investor appetite is subdued. They also remain a risky asset sub-class because of liquidity issues.

There seems to be a strong case for bespoke multi-manager approaches using tactical asset allocation tools. This puts together two areas of research that can be largely quantitative. Looking at the dynamics of asset classes certainly lends itself to a degree of quantitative measurement, particularly when it comes to extrapolating likely future returns from historical data. Fortunately, the way in which this information is interpreted for portfolio constructors is a matter of opinion. Moreover, it is comforting to remember that investors come in a range of shapes and sizes, meaning a one-size-fits-all approach is not an option.

It makes me wonder, though, what this industry of ours will look like a generation or two down the line. You only have to look at how many column inches are devoted to the business of wealth management to realise that there are some heavyweight players endeavouring to gain an edge over their competitors. Not all will succeed but their mere presence will make life tougher for the less well equipped. Just as the industry that has kept me employed for more than 40 years bears little resemblance to the one I joined in the early 1960s, so I expect it to look very different probably not too many years hence.


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