Portfolio construction
Risk management in portfolios has become more sophisticated in recent years but most retail portfolios attempt to manage risk by asset allocation systems, adjusting weightings between equities, property and fixed interest vehicles. When these asset classes move in tandem - as they often do - then diversification is illusory and client capital is exposed. For the most sophisticated investor it may just be that this conventional active portfolio management meets their long-term needs. But for the majority of investments there is a case for allocating substantial elements of the portfolio to vehicles which deliver more predictable returns, protecting some or all of the capital invested and allowing greater security in long-term financial and life stage planning.
Growth products with in-built protection are typically index driven and fall into two categories. Where the index or equivalent is mainstream – i.e. the FTSE100 - then the product will typically offer some form of geared exposure in return for a defined or capped return. As such these investments offer materially higher potential returns than available from cash deposits but without the risk to capital inherent in unprotected equities. The second category of growth product offers exposure to less mainstream investment areas, such as emerging markets, commodities or specific country markets like China. These may or may not offer geared exposure.
Protected Investments as a form of customer relationship management
During a prolonged bull market clients will typically be delighted by a flow of positive annual or half yearly reviews. But in more difficult times, such as these, many advisers will experience challenging discussions with clients who, whilst appreciating at an intellectual level that values may go down as well as up, do not at an emotional level connect with this essential truth. Many advisers still remember the fall-out from the tech bubble and some will have experienced client loss as a result. By contrast, using protected investments takes some of this uncertainty away and may be a suitable response to clients who find surprises an unwelcome part of their wealth management experience.
Protected Investments to avoid the market cycle handicap
Arguably the biggest single issue in UK financial services is the fact that retail investment sales track the performance of the market. A buoyant stock market is reflected in buoyant retail sales. The result is that headline performance figures for retail investment funds are rarely experienced by those buying the funds. This tracker effect is also seen for fund sectors and for individual funds – a top fund manager is rarely spotted prospectively. Investors have never been able to break this vicious cycle. But we think they can simply by placing more emphasis on protected investment vehicles.