‘Accepted myths’ on portfolio construction get challenged

“A LOT of the guiding principles adopted in the industry are false,”Centrestone Wealth Advisoryjoint chief executive Rob Keavney says, setting the scene for his presentation, “A Sceptic’s View of Portfolio Construction”.

Keavney contended that much of the conventional wisdom regarding the role of equities in portfolio construction has not served the industry or investors well.

“The industry, in terms of asset allocation, has consistently followed poor processes. Essentially, the industry has not adopted a rigorous methodology for valuing markets, so our asset allocation has been that a balanced portfolio is mainly in equities all the time, irrespective of the relative value of markets.”

Keavney demonstrated how three valuation measures, applied to the US market between 1883 and the present, show this market was at its most overvalued in 2000, which coincided with the highest levels of net inflows into managed funds being placed in shares — specifically international shares.

He challenged some of the “universally accepted myths”, such as ‘it’s time in, not timing of the market’.

“That implies you can invest at any time, and as long as you hang on for a few years, you’ll get a good return. Statistics show in real terms that the US stockmarket has produced negative returns over periods of one and two decades on a number of occasions.”

The definition of ‘long term’ is also problematic, according to Keavney.

“The long term is the period that a client will live with a poor return before they’ll walk out and sever the relationship with a planner. We don’t have decades for a strategy to unfold,” he says.

The alternative is to be prepared to very significantly change asset allocation levels at times, Keavney says, but this presents difficulties of its own, particularly with existing clients.

“There are real personal and business challenges in saying to a client, ‘Look I know you’ve lost a lot of money in that asset class, but these days I’m recommending a more diversified, more conservative asset mix’. Because the planner is afraid the client will say, ‘Well, what are you saying, you were wrong last time?’”

“But there is a need to put the client first in those sorts of conflict of interest situations.”