Month: June 2013

Big Picture Solutions

Investors are understandably nervous these days thanks to the relentless bad news emanating out of Europe and, to a lesser extent, from the U.S. (not to mention having gone through two significant market drops in the last dozen years).  Many clients are looking for solutions that will dampen volatility, improve investment returns and avoid the worst of any market mayhem.

One of the first things many investors need to consider is if their assets are spread out over too many providers. It can be tricky to assess overall risk when just getting the whole picture is a challenge.  Clients may be reluctant to sever an established relationship but to conduct an efficient portfolio analysis it must include accounts held at all institutions. A fundamental asset allocation analysis would ensure that fixed income instruments are held within registered accounts and equities are held in open accounts as much as possible for optimal tax benefits.

With the overall financial picture in hand, investors are best able to consider alternative strategies such as a tactical (or active) asset allocation which is in contrast to the more traditional strategic or buy and hold strategy.  To implement a tactical asset allocation, the portfolio managers start with the client’s long term asset allocation and makes short term deviations from the long term strategic weights to either capture alpha or limit risk exposure. It is a proactive investment management style that adjusts the asset allocation over time as a result of changing relative risks and returns of various asset classes.

Investors are showing interest in tactical solutions due to the adverse experiences that they have been through over the last few years. A U.S. survey, the Natixis Investor Insights Study, found that 63% of investors are now paying more attention to risk than ever before. Investors are looking for some reassurance that if the market plunges something other than the same old solution of hang on and wait it out is available. In these instances an ability to offer a tactical component to a portfolio has become more acceptable these days.

When considering trying out products with a tactical allocation aspect it is important to consider the manager’s track record otherwise one may be taking on more risk than is required. Investors should only consider those firms that have a proven ability to manage these products. These portfolios must be able to actively shift from sectors and/or markets with excessive risk towards those with favorable characteristics.

The debate over the value of a buy and hold asset allocation strategy versus a tactical allocation has been going on for some time. A tactical allocation has often been derided as market timing and numerous studies have come to the conclusion that jumping in and out of the market is a challenging game. These studies often conclude that by setting a long term strategic asset allocation and by maintaining it consistently, the portfolio will do better in the long run. The problem is that investors often get jumpy when market volatility gets too great or if they feel a greater need to protect their assets.  In these cases introducing an element of tactical allocation may help to retain a twitchy client.

Investors must be able to see clearly their entire financial landscape.  By consolidating assets you will get more accurate statements reduce risk, get better tax planning, reduce paperwork and perhaps get the benefit of lower fees if your combined assets put you in a better tier of a fee structure. With respect to a more tactical or active approach, investors will at least know that different solutions are available. Many have concluded that a buy, hold and rebalance strategy is in their best interest.