However, a benign period of rising equity and bond markets could, until recently, have made the job of those advice companies choosing to run portfolios in-house look relatively easy.
This benign environment has been blown apart by the Covid-19 outbreak. Crises can expose weaknesses in investment processes and, for some advice companies, this will have been no exception.
Performance will have shown advisers whether their portfolios were adequately diversified, whether they had considered liquidity closely enough and whether they grasped how the underlying assets would behave.
Here are five ways in which the crisis may have proved tough for advisers trying to go it alone.
Diversification
No amount of experience can predict what the impacts of a global pandemic will be on businesses, but it can ensure portfolios are resilient to crises.
Part of this resilience comes from adequate diversification, both across equity and bond portfolios, and through the inclusion of alternatives.
However, some of the most effective diversification options often come with liquidity constraints – such as private equity and hedge funds. Investment trusts proved a compelling way to defend capital in this crisis, but investors need the resources to analyse and monitor them.
Meanwhile, property, a classic diversifier, has come under extreme pressure, with funds closing to redemptions and new investments. Having the experience of how best to diversify – and the capabilities to access different sources of diversification – is a key benefit of outsourcing.
Style
It has been a horrible time for value investors. Even the most capable value-focused managers have struggled in this era of low interest rates and unprecedented fiscal spending.
There have also been problems for income funds, particularly as these also tend to have a natural value tilt. Many also had high weightings in the oil majors and banks, and have thus taken a significant hit. Those looking to preserve their clients’ income streams have faced a notable challenge.
It is difficult for advisers with limited time and resources to dig deep into the inherent style biases involved in collective investments. However, investment managers can help advisers to draw from a broad range of options to meet these challenges.
Time
Dedicated time and resources matter at a time of crisis. We had 333 one-on-one meetings with investment managers from March to May, where we posed targeted questions about their current investment approaches.
At times of crisis, this is particularly important. Fund managers can lose their nerve in volatile markets and it is important to ensure they are behaving as expected.
We would argue relatively few advisers have the resources to do this, particularly when they are hand-holding nervous clients.
Volatility
Trading in volatile markets is a challenge. Any portfolio rebalancing needs to be undertaken with extreme care: being out of the market, even for just a few days, could have had a significant impact on long-term portfolio returns.
At one point during the recent crisis, the FTSE 250 was up 20 per cent in just five trading days. Except in exceptional circumstances, we have waited for less volatile and febrile conditions to make switches.
Keeping a level head
The past few years have made multi-asset investing look somewhat easy. Bonds have risen, as have equities, and volatility has been low.
As with any crisis, investors panic. The key is to keep people invested, so they are there when the recovery happens.
There will be egregious examples where investors have sold out at exactly the wrong moment, missed the bounce in markets and permanently impaired their wealth.
All the above demonstrates the importance of constructing a well-balanced and diversified portfolio spread across multiple asset classes, minimising the brunt of sliding markets.
Outsourcing investment management has always been about derisking an advice business. This has never been more important.
Mickey Morrissey is head of distribution for Smith & Williamson Investment Management
