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Time for fundamental allocation rethink

Advisers cannot keep doing the things they have always done and expect the same outcomes, a financial services consultant says.

Friday, February 24th 2017, 6:00AM 9 Comments

by Susan Edmunds

Grant Pearson, of Longitude68, said there had been a fundamental downshift in the world economy, and it was set to shake up traditional investing models.

“Advisers need to fundamentally reassess the whole idea how much they allocate in equities and the subsections of where they do that,” he said.

He said all asset allocation modelling went back 30 to 50 years and was based on long-term norms since World War II.

Since 2007, those norms had all downshifted but advisers and investors were still allocating across sectors as if nothing had changed.

“Fifty per cent of the world’s consumption will come from non-western countries by 2020,” he said. “These so-called ‘emerging’ markets, advisers need to find a way to safely get exposure to them. They are the only part of the world with the growth we grew up expecting as normal.”

Pearson said the global workforce was shrinking, and with it, economic demand and the average returns that could be achieved. "The USA is at just 0.5% growth, four times less than its post-war average...This means lower GDP growth ahead, everywhere long-term. In turn, earnings per share will be driven down as a result. Thus average equity investment returns will also drift lower."

He said advisers would have to rethink the traditional 4% drawdown rule if they wanted to stick with traditional asset allocations.

Those who invested in index funds would need to find sector-specific options, he said. "Otherwise you're only sharing the cost of losing money."

Traditional ways of investing in emerging markets had burnt a lot of fingers, he said, but the industry would need to develop new ways of doing so.

“If I were an adviser I would be revising the drawdown amounts and revising where I allocate money and thinking long and hard about  fund managers that look at these sorts of things versus those that don’t.”

Pearson said advisers found the idea confronting. “The industry is very orthodox. If someone pops up and says 40 years of Morningstar data about how you should allocate assets has to change... I haven’t seen the industry change easily.”

Tags: asset allocation

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Comments from our readers

On 24 February 2017 at 8:54 am Pragmatic said:
Great commentary by Grant - with every industry participant needing to justify their existence going forward.
On 24 February 2017 at 10:22 am Brent Sheather said:
More fake news along the lines of “this time is different” and “active funds outperform”. Predictable and very sad.
On 24 February 2017 at 11:51 am Pragmatic said:
What is sad, is the complete dismissal of an interesting paper (I suspect without reading it), and the myopic commentary that continues to challenge views that are not in line with your own. Predictable and very sad indeed.
On 24 February 2017 at 12:44 pm Chatterbox said:
Trend and long-term investment perspectives have been drilled into so many "qualified" advisers and portfolio managers with the diversification to avoid risk theory that very few are equipped to handle the coming volatility spreads that will shake up returns. As usual education has been based on historic scenarios and not forward projections. Very few consider first where capital is flowing to and then consider allocation and distribution models based on volatile percentages. Some of the worst are the long-term superannuation funds that benchmark off poor performing comparisons to justify their fees.
On 24 February 2017 at 12:56 pm smitty said:
Not quite sure that he is advocating an active approach. What he is advocating is that perhaps basing an allocation on (lets just say) an MSCI representation will not capture the potential of Emerging markets, at least not till it has become last year's story. Ps: I don't openly advocate active management as the sole solution, conversely passive management is not the sole solution either. The author makes a valid point, though in some respects, an obvious one.
On 24 February 2017 at 1:52 pm Anthony Serhan said:
All very good points Grant. If anybody would like to look at how this might impact retirement income please take a look at our research paper on the origins of the 4% rule and Safe Withdrawal Rates - http://corporate.morningstar.com/au/documents/WhitePapers/Safe_Withdrawal_Rates_Australian_Retirees.pdf
On 24 February 2017 at 4:41 pm Brent Sheather said:
It’s pretty obvious from the huge global shift from active to passive that the standard response, from institutions with the benefit of independent trustees, to lower growth and lower returns is to reduce costs. Not to speculate by overweighting specific markets on the basis of an incorrect assumption that you are the only people that know emerging markets will enjoy higher growth.

In any case even if this were true DMS studies show that higher GDP growth doesn’t mean stronger stock markets.
On 27 February 2017 at 3:04 pm Selwyn said:
Perhaps its time to get "boots on the ground" in the various markets, instead of the allocating the investments to another fund manager in those markets to invest for them. That just might increase the low returns enjoyed by many from their payments to Life Companies over the years!
On 3 March 2017 at 9:56 am Longitude68 said:
Good morning all... I have been reading all comments. Have a look at the White Paper.. The Unstoppable Global Downshift". Find it on my Heathcote's website, or on www.changinglifeandwealth.com. Its good to see it generates debate.

Some points to note on a few of them;
1. Hi Anthony, yes your firms paper on safe withdrawals (Morningstar) is absolutely invaluable reading for anyone advising retirees. Good data and tangible things advisers can use.
2. Smitty, u r correct. Not advocating active or passive. The obvious is often missed too.
3. Brent. yes partly agree on correlation to price growth in the shorter term. Longer it correlates well- that's the danger. I'm looking across a portfolio to last 20+ years. GDP and Productivity are still deteriorating- strip out China temporarily holding it all up as an average. It will come home to roost. With E.Mkts there are other ways than investing directly into them.
4. Selwyn. This made me smile. Nestle for exampe has been an investor with boots on the ground in India for 100 years.Ill back them over a suit behind a screen in Oz or NY any day!
5. Brent. I appologise for not being clearer. U misconstrued my message. Have a read of the White Paper for some facts that may surprise you. Fake news.. no just hard cold maths and sound reliable data.

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