A tendency to focus on short-termism and volatility is unhelpful for advisers looking to create and recommend multi-asset funds for clients, the chief investment officer of Atlantic House Investments has said.
Tom May, who is also manager of the Atlantic House Defined Returns Fund, said discretionary fund managers and investment advisers have a "difficult job" when it comes to building and managing multi-asset portfolios.
He told FT Adviser: "DFMs have a difficult job in that they are trying to build multi-asset portfolios to make end investors money in absolute or real terms."
This is why they sometimes struggle to differentiate themselves through performance, even though they tend to revert around the same mean allocations as each other.
Instead, he said advisers and DFMs ought to talk more in terms of predictability of returns and avoid reacting to short-termism and volatility.
If investors know what to expect from an investment, both on the upside and the downside, they are more likely to stay patient through inevitable downturns.Tom May, Atlantic House InvestmentsHe said risk-profiling tools also needed to factor in eventualities such as Covid-19 and similar 'black swan' events.
May explained: "Volatility is an important part of risk management but it is vital that risk profiling tools account for those events which occur too occasionally to consistently be accounted for in volatility numbers but, when they do occur, lead to a big impact for clients.
"These black swan or ‘left tail’ events cannot be properly understood by looking at volatility in isolation. A balanced approach is necessary."
May gave the example of the Defined Returns fund and how it fared during the Covid-19 pandemic in 2020, and the invasion of Ukraine by Russia in 2022.
He said: "Our 'competition' is whether our models are right or not. Given the market moves we saw through Covid, the Defined Returns Fund did what it should have done (it fell significantly).
"Importantly however, investors knew to expect those falls, and nearly all investors stayed with the Fund as it rallied quickly post March 2020 – the models’ predictions of the Fund’s rally were also quite accurate."
Positioning
While the fund, which was at its 10th anniversary last month (November 2023) is approximately £1.8bn in size, the positions are not large when compared with overall size of the derivative markets.
May explained: "We estimate that approximately US$200bn worth of the type of investments the Fund purchases are issued globally each year, and the derivative markets those trades are built on are magnitudes larger than that, so we don’t think crowding is an issue given the Fund’s current size."
He said the managers do not try to foresee market events or use a crystal ball when it comes to making allocations across asset classes.
May added: "We just try and provide building blocks. We believe that if we can provide investments that are predictable in nature then asset allocators are more likely to place our funds in the right places within their portfolios.
"We also think that if investors know what to expect from an investment, both on the upside and the downside, they are more likely to stay patient through inevitable downturns, which will then enable to remain invested when the inevitable upturn happens."
Currently the fund's top 10 positions are gilts, with an overall portfolio allocation of 49.5 per cent in equities. Of the fixed income/cash component of the fund, more than 92 per cent is in gilts or cash.
simoney.kyriakou@ft.com
