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Forward Thinking Magazine : August 2010
3333 Written by Gayle Bryant, Journalist diversify Read this story to receive CPD points. Simply log on to macquarie.com.au /ftmagazine Asset allocation is the exposure an investor or a fund has to individual asset classes. During bullish markets, when most assets outperform, concerns about how much of a portfolio to allocate to a particular asset class tend to be put to one side. During the 1990s, there seemed to be little reason for particular asset class selection as shares and bonds were moving largely in line. However, the situation has now changed. Investment returns have fallen and asset allocation strategies are gaining prominence among financial planners keen to add value to their clients’ portfolios in any way they can – especially as the outlook is expected to stay weak. Some advisers use research offered by companies such as Mercer to help set up “model portfolios” for clients. Model portfolios include a set allocation of assets that are designed to suit particular segments of a planner’s client base. Traditionally they tend to focus on managed funds. David Stuart is Mercer’s Head of Dynamic Asset Allocation. He says the current general trend in asset allocation is towards increasing global exposure. “During periods of high volatility, the trend is to go into low-risk products,” he says. “We are generally favouring overseas markets to Australian ones at the moment. When markets are bullish, investors tend to come back to Australia, but I don’t think in the current market they will.” With the renewed focus on asset allocation comes the need for more fine-tuning of portfolios. While many advisers use model portfolios, with more people now holding a wide range of assets, a more customised service is required. Liz McCarthy, Head of Macquarie Practice Consulting, says clients of financial planners want a more personalised service, but without an increase in fees. “The investment strategy and asset allocation of a portfolio is at the heart of every financial plan and the ability to customise the asset allocation to suit the specific needs of each client is a key value add for advisers,” she says. She says one of the issues of model portfolios, or “presets”, is that they often lack flexibility. “More and more clients have assets that fall outside the model – which usually only include managed funds – and they want recommendations based on their other assets,” she says. McCarthy adds that while advisers want to retain the control they have, they do not want the pain that has been historically associated with simultaneously transacting across investment classes. “They want the ability to take client preferences into account, but not the pain of managing a plethora of models,” she says. “Administering a portfolio that has listed securities does not need to be any more painful than administering one that has managed investments. These days clients want to be able to transfer both types of assets in and out of their portfolios, and have the option of excluding them from any rebalancing an adviser may undertake.” One issue with portfolios is that often a financial planner will only change the asset allocation once a year when the client comes in for an annual review. While this frequency may be fine for many clients, there are times, such as during sudden market falls, when more adjusting needs to take place.