Beware poor management: How popular strategies could derail your portfolio

By Grace Ormsby

September 30 2020
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Investors are being warned that their financial advisers may be relying on outdated asset strategies and systems to manage their portfolios.

How popular strategies could derail your portfolio

According to Australian portfolio manager Dynamic Asset Consulting, too many advisers are still operating on the view that interest rates will continue to fall.

Instead, portfolio manager Dr Jerome Lander said the new reality is that “rates are bottoming out and can’t fall much further in a historical context – and if they do, then mainstream asset prices are probably in big trouble anyway”.

He said the effects of abnormal policies are already having an impact over in the United States, with “big tech names like Apple and Tesla being thrown around on pure speculation in what is becoming an increasingly erratic asset pricing environment”.

Dr Lander is advising that portfolios must be managed differently “in an environment where major economic risks and crises loom large”.

He argued that most portfolios recommended by financial advisers are based on a low inflation environment and falling interest rates.

While that is the benign environment we have had, Dr Lander conceded that “it is not the environment we are moving into and is increasingly unlikely to be the environment of the future.”

He considered the present time as “a key inflection point in markets and an opportunity for advisers to protect their clients and their business from what is coming”.

“The world has changed.”

Expressing concern about one particular strategy in particular, Dr Lander said strategic asset allocation has traditionally been a popular investment strategy for financial planners “looking to balance risk and return for their clients”.

Dr Lander noted one approach has been to allocate 60 per cent of assets to shares and 40 per cent to bonds.

But according to the portfolio manager, the conventional wisdom of this strategy can completely fall apart during an inflection point.

“The 60/40 portfolio split is now a very risky way to run a portfolio. I couldn’t sleep at night running a portfolio like that. There is an urgent need for action right now,” he commented.

Stating that the bubble is not just in equities (as most people think), Dr Lander flagged that it is also present in bonds and traditionally defensive assets.

“We could be entering an environment where you get absolutely no return out of cash and bonds, and little on property and equities over time. We could also see bonds and their proxies get totally destroyed, particularly if we get stagflation,” he forecast.

According to the portfolio manager, governments are likely to keep doing everything they can to create a more inflationary environment or “fail completely in a deflationary death spiral”.

“What’s becoming rapidly less likely is that they’ll walk the tightrope successfully and continue with an ideal low inflation moderate growth environment. Central planning is likely to fail sooner or later.”

Even bonds, which have traditionally held a defensive position in portfolios are worrying Dr Lander, who has warned that they have become increasingly risky in the current climate with a sub-inflation return outlook.

“Defensive assets are broken. Growth assets are expensive. Passive investing no longer works. In this environment an active, dynamic approach to investing has become critical,” he has observed.

But despite all of Dr Lander’s concerns, he does still believe there to be plenty of opportunities available to investors.

“It is probably one of the worst times to be an index investor, yet one of the best times in history to be an active investor as a result of the distortions we are seeing in markets,” he said.

The portfolio manager considered that “there are many areas of the market that are sensible places to allocate capital, yet which aren’t making the papers and that advisers aren’t necessary being made aware of.”

About the author

Grace Ormsby

Grace is a journalist on Momentum Media's nestegg. She enjoys being able to provide easy to digest information and practical tips for Australians with regard to their wealth, as well as having a platform on which to engage leading experts and commentators and leverage their insight.

About the author

Grace Ormsby

Grace is a journalist on Momentum Media's nestegg. She enjoys being able to provide easy to digest information and practical tips for Australians with regard to their wealth, as well as having a platform on which to engage leading experts and commentators and leverage their insight.

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