Greater exposure to growth assets needed

Advisers should be recommending greater exposure to growth assets, even for their most conservative investors, the Norwich Union owned research company says.

FPI Research's recommendation follows its review of its own market exposure models which reveal the prevailing economic environment requires an overall 5 per cent shift to growth assets relative to debt assets across the range of investors.

FPI Research specialises in analysing more than 50 fund managers available through the Navigator administration service.

Research manager Gillian Angel says the review of its market exposure models highlighted issues facing all advisers as they seek to provide returns to match their client's profiles.

"Our market exposure models assist advisers in the construction of their clients' portfolios prior to actually selecting products," she says.

"The changes in the economic environment we have identified clearly affect how a portfolio should now be put together. We have recently seen the Reserve Bank discussing at some length the low inflation and low interest rate environment in which we are operating.

"Through our modelling we have been able to move from an understanding of this environment and apply it to the projected returns for the various asset classes based on a time horizon of five years."

The degree to which advisers need to adjust their portfolio construction to deal with the significant economic shift to a low inflation and low interest rate environment can be seen in the conservative FPI market exposure model demonstrated in the table (above, below, right, left, whatever).

The FPI market exposure models also provide ranges around the strategic benchmark for advisers pursuing tactical asset allocation. The tactical ranges have also been reviewed to ensure that the movements that an adviser makes are substantial enough to add value to the investment and avoid losing any benefits gained through transaction costs. The revised ranges also ensure that the movements are not so restrictive as to prevent the investor achieving their long-term investment objectives as set by the strategic benchmark.

"Advisers diverging from the strategic asset allocation based on a short-term view are still able to manage the overall level of risk that the portfolio is exposed to at any point in time through the formulation of these ranges," Angel says.

"The extension of the minimum and maximum ranges around the strategic benchmark ensures that tactical tilts can be pursued within asset classes to the extent that the overall total portfolio risk is minor."

Angel says developing an appropriate investment strategy essentially involves four key steps.

Firstly, determine the trade-off between risk and return. Then, establish the probability of not achieving the risk and return trade off. Then, identify investor risk tolerance at different time and stages on the investment horizon. Finally, understand the investor's current wealth, projected income and financial commitments at various times and economic conditions.

"Basically, the first two steps are the same for every investor," Angel says. "It's a matter of determining the range of sensible investment options that lie on the efficient frontier or the task of portfolio construction. It is here that researchers can add value for advisers."

Conservative market exposure model