WHEN I STARTED AS A FINANCIAL advisor in 1994, the dollar was sinking, the peso was in a crisis, stock prices were falling and North America was in the midst of arguably its worst-ever bond market. My inexperience – combined with watching my peers struggle through client meetings in tough markets – started me off with a conservative bent.
I would spread a $3,000 investment across a handful of mutual funds. My portfolios became a bit more complex, with hard-asset tilts here, small-cap tilts there. Fortunately, I didn’t take long to embrace simpler structures, but the concept of simplicity didn’t fully sink in so quickly.
I took a decade to embrace balanced funds fully. I had regularly promoted the idea of unbundling these one-decision funds to pocket big fee savings. I was converted by the realization that clients experienced better portfolio performance in balanced funds – net of their higher costs – because clients behaved better when holding these funds. It’s ironic, however, that I took many years of experience and research to realize that simpler solutions are not only easier to manage, but usually more effective for clients.
Here are two portfolio construction themes that can – and should – be simplified:
Pension plans began buying infrastructure assets – e.g., bridges, toll roads – to diversify from public market assets; to generate inflation-protected cash flows; and because the assets were cheap enough to offer high total returns. Advisors lured by infrastructure should evaluate available retail offerings in this same context.
Retail infrastructure offerings consist of mutual funds investing in companies that own and manage underlying infrastructure assets. This structure pushes unitholders two steps further away from the underlying assets – compared with pension funds – while adding significant costs. And this strategy doesn’t allow end-unitholders to enjoy the same portfolio benefits that drew pension plans’ attention in the first place. As infrastructure overlaps several sectors – i.e. utilities, real estate, energy, industrials and telecom – this theme fits nicely within broader global mandates.
Accordingly, money managers who love infrastructure should simply reflect this preference within broader global mandates. HighView Financial Group’s go-to global equities manager holds a few of the bigger infrastructure companies, but does so in the context of a flexible global mandate – where these investments belong, in my view.
A similar argument can be made regarding regional allocations. If clients have planned spending in a foreign currency, simply carving out what’s needed and holding it in that currency makes sense. Or if a client has significant U.S. dollar (US$) income, then avoiding additional US$ exposure in the portfolio makes sense. Barring exceptions such as these, a global fund manager probably is better suited to make the regional allocations rather than having retail advisors allocate pieces of client portfolios to each of the U.S., and overseas developed and emerging markets.
You can add great value for your clients if you spend less time picking themes, regions and sectors – and more time on client discovery, matching investment assets with future spending liabilities, designing an asset mix that addresses both goals and risk constraints, and providing robust and clear reporting. IE
Dan Hallett, CFA, CFP, is vice president and principal with Oakville, Ont.-based HighView Financial Group, which designs portfolio solutions for affluent families and institutions.
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