Simon Ibbetson of CPG Research & Advisory explains the role and purpose of independent investment research and advisory specialists in being able to create portfolios which meet clients’ needs and expectations.
Date: Oct 2010
This starts, he explained, by looking at a client’s needs and investigating their risk tolerance and return expectations. The adviser should also ask the client questions about whether there are any asset classes or securities they don’t want to invest in, perhaps from an ethical point of view.
The next stage is to look at how to build the asset allocation, he said, given that this typically adds 80% of the value to any portfolio. As a result, it is critical for an adviser to get this part of the process right.
To do this, Ibbetson said advisers need to understand the return profiles of each asset class, as well as their return prospects over the next three to five years – which will depend on things like the current valuations of the assets, the economic outlook for the various economies where those assets are based, the inflation rate and the risk-free rate.
This requires a lot of assumptions based on an adviser’s knowledge and understanding of the markets, he said.
Once this has been done, Ibbetson said the adviser must select managers to fill the individual pots in the portfolio. That requires the adviser to know the managers, to have done the research on them and to have the faith and trust in them that they will stick to their processes and policies and meet their expectations – which means expectations based on what they say they can achieve from that asset class, he added.
Assessing fund managers
When looking at individual fund managers, Ibbetson said an adviser should ask them a lot of questions to determine their knowledge and experience, and their ability to add value.
This is not just to cover their particular sector, he explained, but also how that sector works in relation to others, whether domestically or overseas.
This would indicate whether the manager really understands the dynamics and impact of economic factors in various countries, for example.
An adviser should therefore make two assessments, said Ibbetson: first, whether the manager has the skill to execute their process effectively; and secondly, whether the process is going to actually add value over time.
Looking at track records
While track records can be interesting, Ibbetson said they tend to only be relevant if they are repeatable. So if the principals of the fund are the same and have a long track record, there might be some value add, explained.
What he said is very important, however, is integrity and honesty at every level and in every conversation with a manager. And any breach of these characteristics should lead to an adviser excluding that fund manager, he warned.
Ibbetson said he thinks it is also important that fund managers are personally invested in their own funds.
He said he is less favourable towards large fund managers, given that these portfolio managers, analysts and researchers don’t have – and don’t need to have – a portion of their own wealth in the fund. Whereas in smaller and medium-sized funds, he said the principals often have a lot of their own money in the fund, and their returns are directly linked to the profitability of the fund, meaning that if the fund does well and their clients do well, then they do well. This is a good alignment of interests.