What is the main benefit that you provide to your clients? Some 63% of advisers named advising clients on the asset allocations of their investment portfolios as their biggest contribution. Specialist investment researcher Investment Trends put the question as part of a comprehensive new survey of more than 800 financial planners. Other common answers given by advisers included helping clients diversify their portfolios, explaining investment concepts, providing technical knowledge and constructing portfolios. Several of these responses are, of course, closely linked. The importance of a portfolio's asset allocation - the proportions of its total assets that are invested in different asset classes of mainly local shares, international shares, fixed interest and cash - is difficult to underrate. In short, the asset allocation of a portfolio should reflect the degree of risk an investor is willing to take to achieve investment returns. By setting appropriate strategic asset allocations, investors can spread their risks and opportunities over the long-term rather than getting caught up with the emotions of the market and trying to pick the best times to buy or sell. Smart Investing consistently reminds readers about a landmark research paper published in 1986 by three US academics regarding the significance of an investor's asset allocation. The paper - Determinants of Portfolio Performance by Gary Brinson, Randolph Hood and Gilbert Beebower - found that more than 90% of the variation in the returns of 91 US pension funds over time was attributable to their asset allocation. In short, the asset allocation of an investment portfolio was found to be the primary driver of long-term performance. This research is just as relevant today - perhaps even more so given the continuing fallout from the GFC, which continues to underline why an appropriate asset allocation really matters. Again as Smart Investing has discussed in the past, investment researchers with Vanguard in the US published earlier this year published a report, The Global Case for Strategic Asset Allocation, revisiting the Brinson, Hood and Beebower research. It makes fascinating reading. Vanguard researchers expanded the earlier research to cover the performance of balanced managed funds in Australia (336 funds), the United States (518 funds), Canada (245 funds) and the United Kingdom (294), spanning various periods from January 1962 to December 2011. Apart from reinforcing the importance of asset allocation to a portfolio's return, the researchers found that broadly diversified balanced funds with limited market-timing "tended to move in tandem with the overall financial markets over time". However, actively-managed funds recorded "significant" differences in performance in the four countries studied. And the researchers found that, on average, active investment management "reduced a portfolio's return" compared to a passively-managed index fund. By Robin Bowerman
Smart Investing Principal & Head of Retail,
Vanguard Investments Australia
6th December 2012
19th-December-2012 | 