Most seasoned expats have managed to accumulate some offshore
financial holdings over the years. Let’s assume that
one of them (Investor ‘A’) living in Bali has
tucked $100,000 away into an offshore portfolio. Let’s
assume also that he has 20 years to go to retirement and that
he told his adviser he was looking for capital growth. His
portfolio might contain 50% of US stockmarket funds and 50%
in a hedge fund. Why? Because those were the investments suggested
to him by his adviser.
Now let’s take Investor ‘B’ who lives in
Dubai, also has 20 years to go to retirement and is also looking
for capital growth. His portfolio might contain 20% in US
stocks, 60% in emerging market stocks and 20% in bond funds.
Now if we take Investors ‘C’, ‘D’,
‘E’ and so on ad infinitum we are likely to find
every single portfolio is completely different. Just like
snowflakes, no two portfolios will be exactly the same.
This situation is nothing short of chaotic
What it also means is that no two investors are likely to
achieve the same results. Investor ‘A’ might make
40% over five years, Investor ‘B’ might make 100%
and Investor ‘C’ might lose 50%! Investor ‘D’
could even lose all his money if he put all his eggs into
a dubious fund that collapsed on the scale of Enron. Their
fate depends either on their own judgement or the skills or
lack thereof of the advisers who chose the funds for them.
Historically this has been little short of a lottery and why
responsible firms of financial advisers are now adopting a
totally different approach.
No-one can be an expert in all fields
The role of the financial adviser is changing. He used to
be the planner, the asset allocation expert and the fund selector.
Some even claimed to be stock pickers. Leading players in
the industry now ensure the separation of the different skills.
The financial adviser’s correct role is that of planner.
He or she assesses the needs and goals of the client and comes
up with solutions to help the client reach those goals. This
is the equivalent role of the GP in the medical field. Where
specialist skills are needed, such as trust or estate planning
services, the client is referred on to specialists in those
fields within or outside the company. Where an investment
is to be made, many other specialists come into play.
The first one is the asset allocation expert
This actually tends to be a team of experienced professionals
who have studied portfolio behaviour in depth. They will come
up with a range of asset classes of different types and volatilities
which will result in equivalent or better growth than a conventional
portfolio but without the same level of volatility. The problem
with volatility is that while investors like to see large
gains, their tolerance for losses is limited and history has
shown that such losses frequently lead to abandonment of investments.
While stocks may offer the greatest potential for growth over
the long term they do not work alone in practice because of
the frequent ‘negative’ periods which investors
cannot tolerate. Hence the acceptance at last of ‘modern
portfolio theory’ which was actually developed in the
80’s but ignored during the stock market boom years.
The asset allocation experts will also determine the percentages
of each asset that are appropriate to various levels of risk
which will have been determined by the financial adviser.
Then come the fund selection experts
Because markets are almost ‘efficient’ in that
the price of a security fully reflects all the information
that could affect its movement, it is quite a challenge for
a fund manager to outperform the index, since everyone else
has access to the same information. Or almost everyone else.
This is where a skilful fund manager can beat his peers by
research that provides him with information over and above
that which has been commonly acquired. The job of the fund
selection experts is to identify these fund managers. Such
people may be heading up a fund of a well-known institution
one day but the next day could be setting up their own fund.
The astute fund selector will drop the brand and follow the
star manager.
And what does this star do that is different?
He probably does much the same as his peers but he does it
better. His job is to find the best value in shares as well
as keeping an eye on the macro picture. He will hold meetings
with company executives to assess the prospects of a company
relative to its competitors. He will ‘look under the
carpets’ to find reasons not to buy as well as reasons
to buy. He will look for unique opportunities. One of the
top funds in the early 90’s, Old Mutual’s European
Stockmarket Fund was managed by a man who sought out opportunities
on the fringes of Europe. He placed a large bet on Nokia long
before it became a household name. These are the people who
are qualified to select stocks. Not the financial adviser
or the asset allocation expert or fund selector.
The result is harmony
By ensuring each specialist sticks to his own field but that
all of them work together as a team the result should be consistency
in the management of clients’ investments throughout
the world. Some may feel they still want the ‘excitement
of the chase’. In my own organisation we do not take
that away from those who so desire but we do recommend they
limit themselves to a maximum of 20% of ‘non core’
investments. The 20% could ‘go through the roof’
if the timing is right, but if it falls through the floor,
the 80% core is still intact. We use a ‘core’
that is actually called Harmony. We are even holding a convention
in Bali this month at which global acceptance of the principles
of ‘modern portfolio theory’ is likely to be reinforced.
The industry has come a long way in a short time. It will
take a while longer to win the full confidence of an investing
public that has burnt its fingers more than once, but we are
on the right path!
Colin Bloodworth is a senior adviser with Financial Partners
International. The opinions expressed are his own. If you
have any questions related to personal finance you may contact
him at 021 520 8099 or colin.bloodworth@financial-partners.biz
