Sunday Times Article on Portfolio Management, 31 October 2021

Author: Jonathan Sheahan, Managing Director of Compass Private Wealth

Published: Sunday Times Business Section, 31 October 2021

Probably the most basic and fundamental starting point in a Wealth Management strategy is the decision around what the Asset Allocation should look like. Regardless of the size of your Capital base or the amount of ‘investment structures’ or individuals (say within a family) that comprise the Portfolio, it is firstly imperative that, from a holistic perspective, there is a clear plan on how the overall Capital is split across the various asset class options in line with your risk mandate, preferences and restrictions.

Firstly, let’s deal with how challenging it is to decide on how assets can be allocated in the current environment. One may argue that Investors are no win the most challenging and unprecedented period for Asset Selection in generations. Years of low interest rates & Quantitative Easing (QE) from Central Banks has completely distorted the theoretical risk v return analysis when assessing investment opportunities. In the current climate, this means that there is presently no simple solution as to where to park assets to meet your stated risk objectives.

Regardless of what Asset Class your wealth is allocated in, there is Risk with everything.

• If all of your Assets were in Cash or Government Bonds, then you would be yielding zero interest in an inflationary environment that could consistently be at 3% p.a., meaning that you are losing 3% of the purchasing value of your assets on an annual basis

• Conversely, if all of your Assets were in high-risk Property / Equities, then there is a risk at any stage of an abrupt and sustained market sell-off, leading to a significant drop in asset values and / or incomes off the assets.

The reality is that Assets need to be parked somewhere, regardless of the risk and sometimes investors need to go with the ‘least worst option’; So let’s go through the various asset classes one-by-one to convey these challenges:

• Cash Deposits are yielding zero interest. In some cases, deposits are earning negative interest of -0.65% p.a. held through Pensions & Corporate accounts, and over a certain amount (e.g. €1m) for personal deposits

• Bonds are usually the ideal asset class to serve as a liquid hybrid solution between low-risk Cash and higher-risk Equities. In a normal and more stable interest rate environment, a portfolio of conventional Government & Corporate debt, diversified across issuers, geographies and maturities is a very practical strategy to achieve a level of income at or above the prevailing rate of inflation. However, the monetary policy in place over the last number of years has pretty much made long-only bonds as an uninvestable asset class, as the blended yields in the aforementioned Bond portfolio may now be close to zero, and in fact negative when your price in fees

• Global Equities are close to all-time highs in a number of markets, which makes the decision around lump sum investing with an Equity Mandate, whether it be passive or active, very challenging, in particular when we look at certain markets like US Technology

• Investing in Property in Ireland, or even internationally, whether it be by bricks & mortar investing or in listed REITs / Funds is as uncertain as it ever has been. The Covid landscape resulted in a huge initial shock to both commercial and residential valuations and the speed and strength of the recovery has been bewildering to say the least

• There are a plethora of Alterative Asset Classes, many of which are available at the click of a button on your smartphone or aim to achieve a return completely uncorrelated with the wider beta return from long-only strategies. Some options with the Alternative space do have merits, but the challenge investors have here is the increased due diligence and uncertainty that goes hand-in-hand with this type of strategy. 

The good news is that there are very practical solutions:

1.       Once the target asset split is agreed, the next challenge is how this strategy is populated through each of the different ‘structures’ available, which may include, but not be limited to, personal bank accounts & investment portfolios, pre-Retirement pensions, post-Retirement ARFs, Trust accounts for children, Corporate structures etc. It is quite ineffective and inefficient for an individual or family to have the same risk mandate for each available structure. It may make more sense to increase risk in certain tax efficient vehicles (like Pensions & ARFs), and counter-balance that higher risk exposure with disproportionally less risk with say your personal savings, when having access to funds for liquidity purposes is important. Having clear mandates in place for each structure always gives more peace of mind

 2.  For fear of sounding like a broken record beating the diversification drum over & over again like most market commentators do, but there really is no substitute for simple, structured portfolio diversification where all the proverbial eggs (Euros) are as spread as possible into as many different baskets (asset classes, geographies, managers and sectors) as possible. One other clever diversification strategy is timing: both going into the market and coming out of the market. This can reduce being exposed to sudden downturns (when investing) or rallies (when disinvesting).

 3.  Think Big Picture: Consider all of your capital assets holistically and always look into the long-term. Yes in the short-term this investment landscape is extremely challenging for the above reasons, but interest rates will revert back to normal in future years and we will get back to predictability again in Portfolio Construction. For those who have funds invested in a Pension with at least a 10-year time horizon, the market sell-offs and general volatility shouldn’t really be a big concern, as prices will almost always recover in the long-run. Having a big picture view of your wealth can enable you to avoid knee-jerk reactions and panicking in the event of short-term market events.

Jonathan Sheahan is Managing Director of Compass Private Wealth with offices in Dublin and Cork.

Disclaimer: The above is generic in nature and does not constitute financial advice.