Change Can Be Complicated

Determining the right time to make asset mix changes to client portfolios can be complicated assuming a client’s financial situation and goals have not changed. As an advisor, you spend considerable time ensuring your clients have a proper asset allocation, but sometimes market conditions shift or attractive investment opportunities arise which necessitate changes.

The market situation today is particularly challenging for advisors as equity markets are coming off a historic bull run but it is unclear whether prices have declined enough to reflect a possible upcoming recession. At the same time, many advisors are loath to reduce client equity allocations for fear of locking in losses before a potential market snapback. The same conundrum exists in the fixed income world. Bonds are having one of their worst years in decades and, as prices have dropped, yields have risen to more attractive levels. However, additional central bank rate increases are expected which could take yields even higher and prices lower so it is also a tough call as to whether advisors should sell down client bond positions.

However, decisions about client asset mix should ultimately be made with the long term in mind as timing any market over the short term is next to impossible. It is also critical to implement an asset mix that a client will be willing to maintain over the long term especially through bad market periods. We have all dealt with clients who say they want a high-risk portfolio with a heavy publicly traded equity component, until a market downturn occurs and they decide they want to sell equities, unnecessarily locking in losses.

For this reason, we are big believers in looking to the institutional investment world for best practices to reduce portfolio volatility and minimize the impact that ill-timed client decisions can have on long term portfolio returns. Over the last few decades, a consensus amongst institutional investors has been building that the so-called “Endowment Model” is the best way to optimize returns and reduce risk. This investment approach targets a highly diversified asset mix with a healthy balance of both publicly traded equity, liquid fixed income and private asset strategies such as private credit, private equity, venture capital, real estate and infrastructure.

Successful institutional investors did not move toward introducing significant private asset allocations to their portfolios overnight. Instead, they carefully established an asset allocation target mix and then made adjustments over the course of several months or years to implement it. The same holds true for an advisor’s clients. Ideally, major asset allocation changes such as a shift to incorporate more alternative investments should be completed over several months by gradually reducing allocations to traditional investments (i.e. equity and bonds) and replacing them with a diversified mix of private asset strategies.

Making gradual changes essentially allows you to mitigate risk by dollar cost averaging, while still maintaining some equity upside in the event of a short-term upswing in markets. The opposite is true, of course, if markets worsen as you will at least have mitigated losses by reducing some of your market exposure.

Finally, in order to obtain the full benefit of introducing private assets to your client portfolios, it is important to take a truly diversified approach to accessing this $12 trillion global market. This means diversifying across (i) asset segments (corporate credit, real estate lending and equity, private equity, venture capital, infrastructure, royalties, leasing and other niche strategies), (ii) geography, (iii) asset managers and (iv) fund vintages.

Please contact us to learn more about accessing our diversified, institutional-caliber private asset funds specifically designed for private clients and their financial advisors.