Innovation key to portfolio construction...

CONVENTIONAL portfolios have largely failed retail investors and financial planners need to reconsider incorporating a fuller range of appropriate investments, according toSelect Asset Managementchief investment officer, Dominic McCormick.

McCormick told theFPAAnnual Convention in Adelaide such an approach is necessary if advisers are to focus on the real investment objectives of clients.

“I’m simply amazed that large parts of the investment industry just don’t seem to get it. Retail investors are, and always have been, primarily interested in absolute returns relative to cash and capital preservation,” he said.

“This doesn’t mean they cannot handle some exposure to market risk and volatility in their portfolios, but they need to know their fund managers and advisers are at least focused on the right objectives,” McCormick said.

However, he claimed instead of looking at these requirements, the industry “continues to trot out the same tired, benchmark driven, conventional portfolios that have underperformed cash over the last five years and that have failed to deliver the promised returns over longer periods”.

“Without the tailwind of the 80s and the 90s bull market in equities and bonds, such portfolios may well continue to struggle in the future,” McCormick said.

He said he is not actually suggesting such portfolios can’t do reasonably well in a more positive environment, but believes the continued lack of innovative thinking to create portfolios that can actually deal with a range of investment environments and meet the real needs of retail investors is surprising.

McCormick said the need to re-look at portfolio construction isn’t simply a reaction to the difficult market environment of recent years, but a result of the investment industry becoming too inflexible.

“Strict adherence to static asset allocation benchmarks, index hugging and an obsession with style and sector neutrality has created a mindset that actually inhibits the creation of portfolios that make clients money and preserve capital. It has also tightly constrained true investment choice for clients,” he said.

McCormick believes financial planners need to consider the extent to which they should be heavily involved in investment selection themselves or whether they should outsource it to other parties.

“If planners do it themselves they need to ensure that they have a clear and disciplined approach that can properly consider the full range of investment alternatives in building well-diversified portfolios.”