Financial advisers have rubbished claims made by investment academics who profess to have discovered the “holy grail” of outsourcing clients.
The claims, made in a research paper by the Cass Business School, have been dismissed as potentially risky for clients.
In the paper, ‘A Centralised Investment Process: joined up investment thinking’, authors Steve Thomas and Andrew Clare claim to have isolated a magic formula for a simple, systematic process for advisers to outsource their clients’ investment management needs.
But the paper has come under fire, with experts claiming a “terminal flaw” could see clients placed into assets shortly before they fall in value.
Jim Wood-Smith, CIO of Hawksmoor Investment Management, said while most of the paper was good, the authors “lose the plot” when it comes to asset allocation.
The paper rejects any form of forecasting when it comes to asset allocation, relying instead on measures of historic volatility in each asset class to calculate portfolio weightings.
Mr Wood-Smith said the use of solely historic volatility was a “cardinal sin” that gave the work a “terminal flaw”.
He said: “Historic volatility is not risk, which is why sensible people put expectations, not forecasts, into optimisation models.
“Using historic volatility makes you give the maximum allocation at the peak of any asset cycle and the minimum at the bottom.”
Scott Gallacher, director of adviser firm Rowley Turton, said the asset allocation outline in the paper was “questionable”.
He said: “I am unfortunately old enough to remember ‘model portfolio theory’ and stochastic modelling to be all the vogue, again based on historic volatility and correlations.”
Cass has teamed up with risk profiler FinaMetrica and fund selector CleverAdviser as part of its blueprint for the ideal outsourcing solution.
Mr Thomas said Cass had not received any direct funding for writing the paper, but acknowledged a “commercial relationship” with Clever whereby Cass would receive money if advisers signed up for Clever’s service.
Responding to the criticisms, Mr Thomas said: “I have spent 40 years trying to forecast asset class returns and nothing really works. Knowing the valuation of something does not add value.”
Mr Thomas said the use of historic volatility was the only way to provide a consistent, systematic process that could be widely used and understood by advisers, without the need for any sort of forecasting.
Investment professor gives his verdict
James Clunie, former finance lecturer and manager of the Jupiter Absolute Return fund, has welcomed the Cass paper as a “sensible starting point” in the quest to find the ideal outsourced investment proposition.
Mr Clunie said the paper seemed “grounded in real-world practicalities” and not just reliant on theory. He added its ‘risk parity’ approach to asset allocation may have its detractors but was prone to “less error risk” in using the system and less chance for things to go badly wrong.
