It’s that time again; when we reflect and begin to plan our path for the new year. Safe to say, 2020 has been tough for most, and with the year being such a whirlwind of economic ups and downs, it can be worthwhile to recap some important strategies. These not only pay off for clients but are useful refreshers to keep in mind for any investors.

Expected Returns

Making changes to investment portfolios off the back of a tough year like 2020 is not an easy decision. There is often the risk of leaning towards a more emotional choice than a rational one.

That is why taking a three to five-year view or longer is recommended to understand how a portfolio measures up, relative to its benchmark and its peers.

Based on last year’s returns, you will be able to see how much volatility or risk is built into a portfolio and that should provide clarity for going forward.

Cost of Funds

Try to obtain a portfolio that allows you to generate alpha, while remaining mindful of costs. Passive funds are cost-effective, but often buying the market beta does not allow you to generate growth alpha.  Having too many portfolios that are blended, on the other hand, can also be expensive, depleting any alpha after costs.

Often a blend of passive and active funds can be structured through an active multi-managed portfolio, but price sensitivity should remain.

It is also important to understand how your performance fees work, when they are taken and how they are benchmarked, as these count as an additional layer of costs, deducted from the return.

Change is as good as a holiday

There are a wide range of portfolios that still offer a ‘vanilla strategy’, built when it was appropriate. Today, many investors are still in the same portfolios with little change in their investment exposure. They need access to alternatives that can enhance the value of existing investments. For example, exposure to China has increased recently, given its optimistic growth outlook. Alternative asset classes, impact investing and ESG, are all essential considerations for a robust investment portfolio.

Combating too much choice

Too often individual members that make there their own investment choices (for example in an employee pension fund) will go by brand to make their selection. It is difficult to choose an unfamiliar name, especially when there are many choices available. This is why it is always advisable for an independent financial advisor (IFA) to guide the process of understanding the different funds, their performance, expectations and risks.

A multi-managed option could provide a solid foundation as it encapsulates many different managers, which provides diversification through style, manager, stock selection and geographical location. Diversification can be the choice between getting the right exposure and missing out altogether.

Keeping the above in mind, ensuring the correct exposure according to risk profile is factored in, will go a long way this year and beyond.

– Craig Abbott
co-head of institutional discretionary fund management, RisCura