A managed portfolio is a professionally managed investment portfolio that invests across a diversified range of Australian shares, international shares, property and infrastructure, cash and fixed interest, and alternative assets. This exposure can be accessed through managed funds, exchange traded funds (ETFs), directly listed and unlisted investments. A professional manager oversees a portfolio, using discretionary authority to make investment decisions, then implements them where appropriate and beneficial for the objective of the portfolio.
These portfolios often use Dynamic (or Active) Asset Allocation which is an efficient method of managing portfolios taking a more objective approach to investing, selecting investments on the basis of expected future performance, and not simply relying on post-performance data. It incorporates more forward-looking economic models which can be implemented quickly to take full advantage of immediate opportunities presented by markets.
How is it different to the current portfolio management process?
The traditional approach to managing a portfolio that is diversified across asset classes, is to construct portfolios using relatively static long-term Strategic Asset Allocations. Such portfolios implicitly assume that the valuation or relative risk and return of different asset classes are stable through time but history has shown that they are not.
Strategic Asset Allocation relies on markets achieving their average rates of return over a long period of time, which can mean periods of high volatility and holding asset classes that are overpriced. Strategic Asset Allocation can generate significant medium-term volatility of returns, making it unsuitable for consistently achieving objectives. It is not flexible enough to cope with the high levels of volatility of our current markets.
Within the Dynamic Asset Allocation process used in a managed portfolio, the allocation to asset classes is made by investing where return expectations align with the portfolio’s performance objectives (e.g. CPI plus 4.5% over rolling 3-year periods). If potential return is not seen in an asset class, then funds are not allocated to that asset class.
Portfolios are adjusted regularly when the view of markets change, by buying and selling to reflect the revised view. As such the asset allocation ranges are wider than those used in Strategic Asset Allocations, providing the flexibility to allocate effectively and efficiently to those assets expected to contribute to achieving objectives. However, the higher level of turnover with active asset allocation increases the probability of realising short-term capital gains, which is less tax efficient. It also has the potential to increase costs.
These portfolios can be adjusted (within certain ranges) without the need for us to provide a Statement of Advice each time a change is to be made. This is a significant improvement on the time taken to prepare and exchange required paperwork, potentially affecting when investments are bought and sold.
A managed portfolio is held within an investment or superannuation wrap account, the same way as a portfolio of individual investments.
Who manages the portfolio?
There are many providers of managed portfolios available across the managed portfolio market. Outlined below, is the process used by a sample portfolio manager.
This portfolio manager conducts global research using proprietary processes to identify the best investment solutions to match the specific exposures identified by the asset allocation process. The investment selection process starts with detailed quantitative analysis followed by qualitative reviews.
They employ a four-step investment process which reflects the practical experience gained by its principals over the past 35 years:
- Asset Allocation: Using forward-looking economic models, they work with clients to construct the right portfolio for the prospective environment. The process identifies a range of portfolio choices and the trade-offs between each option. Central to the process is disciplined stress testing. The need for stress testing arises from significant uncertainty about what the future holds, and the recognition that a robust strategy cannot be designed from consideration of just one set of assumptions. They use history as a guide only and recognise the possibility that extreme events can occur more frequently than history indicates.
- Investment Selection: Because they don’t run their own managed funds or investment products, all investments chosen for their model portfolios are formulated by outside providers. This allows them to maintain an independent approach to investment selection. Quilla conducts global research using proprietary processes to identify the best investment talent they can find to match the specific exposures identified by the asset allocation process. The investment selection process starts with detailed quantitative analysis followed by qualitative reviews. Quilla will use a range of instruments including unit trusts, mandates and exchange traded funds (ETFs). When appropriate products aren’t available, they can access customised strategies to meet clients’ objectives. Portfolio construction is a quantitative exercise calculating the expected risk and return properties of a portfolio to check against the client’s objectives.
- Thematic Management: From time to time their proprietary models identify market dynamics offering opportunities to enhance return and/or reduce risk. They can incorporate these views into clients’ portfolios by fine tuning asset class, sector or strategy weightings.
- Monitoring and Review: They regularly update asset allocation models and adjust portfolios when required. They also run a detailed monitoring program at the sub-asset class level to ensure that the investments used to populate a portfolio are performing according to their expectations. This program leads to a structured set of actions to follow up on an investment which may not be meeting expectations. In keeping with all of the investment processes, this is a forward-looking program which is designed to identify potential issues with an investment in a timely and objective manner, rather than letting underperformance run on unchecked.
Does this change the overall advice process?
At a fundamental level, a client’s portfolio and overall situation will be managed with the utmost care and consideration to ensure their long-term financial and personal objectives are met. The use of a managed portfolio adds efficiency to the process, while not sacrificing transparency of investments, nor altering the overall cost structure in any significant way.
While a managed portfolio will form the core of clients’ portfolios, using them does not preclude the selective use of direct holdings in listed investments or asset class specific managed funds.