InvestmentsNov 12 2015

DFM Q&A: ‘We try to take a visual approach’

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DFM Q&A: ‘We try to take a visual approach’

PortfolioMetrix chief executive Brandon Zietsman and UK head Mike Roberts discuss creating a ‘continuum’ of returns.

How large is your UK discretionary offering?

We work with 13 firms in the UK, with about £430m in assets. We are growing at about 20 per cent a quarter. We are able to target a family office-type firm, or a tiny business, but we are not gathering assets for the sake of it.

The model portfolio service (MPS) marketplace is becoming increasingly crowded. How do you define your approach?

I don’t believe you can’t do scaleable and customised at the same time. We provide the adviser with the analysis tools they need through our in-house software, Wealth Explorer.

We are looking to deliver a return for a given level of risk, and that means what you have to do is create a continuum.

We show the ARC indices, WMA indices and others to advisers, and even some of the big guys don’t always produce what you’d expect.

Has asset allocation become more difficult given the elevated valuations seen across a number of asset classes?

Our starting point is the maximum point of naivety. If you assume every asset class is fairly priced, what would an equilibrium risk/return and volatility profile look like?

Market timing opportunistically tends to be a casino game. We use a barbell approach. One of the customisations we are able to have in the UK is the ability to have more absolute return funds in the cash and stable income allocations.

A lot of model portfolio service thinking has become apologetically governance/compliance-driven. In my mind, if you’re doing stuff right, your regulatory boxes have been ticked.

How does risk profiling interact with your service to clients?

We could not find a single firm who said they would be using their risk profiler if they thought regulation didn’t demand it.

Why are these tools so low in demand? We looked and said, “Is it possible to build something that people would use if they didn’t think they had to?” There are three parts to this: the first is information, the second is engagement to support the proposition, and the third is making sure it can be used as an education tool.

We provide our own behavioural analysis – not just on attitude to risk. If they’re using a third-party behavioural tool we’ll map that onto ours.

There is a caveat we have built into our tool to ensure the client does do suitability risk, and we reserve do the right to audit that process.

How does capacity for loss feed in to these assessments?

We try to take a visual approach. We’ve built in capacity for loss, also drawdown – so we can show different glide paths. I don’t think you can judge capacity for loss via a questionnaire. A lot of attitude to risk tools have started to suck in capacity for loss questions –that is a big fail to me. It needs to be modelled.

Delivering to a mandate is how advice connects with investment. Portfolios need to perform consistent to expectations. You can only have one view on a certain set of economics. Applying that consistently is the important thing.

What kind of fee pressure do you see being applied to MPS providers?

We charge 35bps plus VAT for the service, then 0.5 per cent to 1.2 per cent for the fund range. The fee is fixed – there is no incentive to change it at a certain level of assets.

But we still see advisers splitting funding – paying for this firm’s balanced fund and that firm’s balanced fund – and they are paying an equity-like fee for these portfolios.