New asset classes, investment strategies and pricing structures have led to many advisers questioning traditional investment models, according to a global poll carried out by Natixis.
In the asset management firm’s latest survey, which questioned 2,400 advisers spread across the globe, it was found that 77 per cent of respondents believe traditional stock and bond portfolios are no longer efficient in providing returns and managing risk.
This is up from 50 per cent in Natixis’ 2014 survey and from 49 per cent in their 2013 survey.
Survey results over 3yrs
Source: Natixis
“For many, it starts with the basic notion of what investments belong in client portfolios. More than three-quarters of advisers say a traditional stock and bond portfolio may no longer be enough to meet return goals and balance risk – this represents a 27 per cent increase over our 2014 survey,” the report stated.
“As they look to find the right solution, advisers are discovering that the fundamental measures of diversification that have been in place for decades are not helping to address these concerns. Nearly seven in 10 advisers say traditional style box analysis is no longer enough to ensure adequate diversification.”
“Another 63 per cent say advisers need to replace traditional portfolio construction and diversification techniques to achieve results – a 13 per cent increase over our 2014 findings.”
These results are likely to be linked to a move away from an emphasis on returns and an increased focus on risk, which was also found to be apparent in the survey. 
The top three concerns advisers had that led to positive views on alternative investments were the need for portfolio diversification at 76 per cent, insulation from volatility at 76 per cent and striking an optimal risk/return balance at 80 per cent.
However, Martin Bamford (pictured), chartered financial planner and managing director at Informed Choice, argues that blended bond and equity portfolios can still do a good job of managing risk through diversification when judged over the long term.
“Alternatives have become more appealing in recent years in a lower return environment, which has had higher volatility and greater correlation between mainstream asset classes,” he explained.
“One that we routinely use is commercial property. I am yet to be convinced that absolute return or hedge funds add significant value in return for their cost, complexity and inconsistent return profiles.”
Nine out of 10 advisers that took part in the Natixis survey said that risk analysis plays an important role in their selection process.
While it seems that risk profiles have jumped up the priority list over recent years and 87 per cent of advisers say they have an accurate understanding of the risk in their portfolios, the report released found that it isn’t as clear-cut as that.
After analysing thousands of adviser portfolio models, Natixis found that advisers often struggle to accurately measure portfolio risk due to the wide range of different metrics available.
While some portfolios focused on standard deviation, for instance, others focused on either maximum drawdown, which measures the biggest peak-to-trough difference over a given time frame; value at risk, which measures the amount of potential loss over a given time; or beta, which measures volatility compared to a benchmark.
The metric that an adviser uses of course depends on exactly what they are looking for and what the aims of their clients are.
Neil Jones, investment manager at Hargreave Hale, believes that determining the risk profile of a client is complex for a variety of reasons and that advisers should tread carefully when deciding how cautious their client is.
“A question you have to answer is what sort of risk is being managed? Here risk is often used to mean volatility, but of course they are potentially quite different things. For example, there is a risk of wealth, be it capital or income, not keeping up with inflation, which therefore requires growth, so on this basis a cash based product would provide a risk, despite this having virtually no risk in terms of volatility,” he pointed out.
“Many advisers are [also] increasingly using ‘risk tolerance questionnaires’ to analyse clients and direct how their portfolio should be structured. While a more sophisticated approach is welcomed, sadly this approach is often flawed and abused by firms.”
Jones believes that the attitudes of clients on the day they are surveyed could easily be swayed by external factors, such as whether they had to pay a large and unexpected bill that morning which could make them more cautious, or whether they have had a pay rise recently which could make them more bullish.
It is also this grey area in terms of risk measurement that has led advisers to up their exposure to alternative investments as a means to enhance risk management in general, with seven in 10 advisers saying they use alternatives in clients’ portfolios, although mostly for those that hold between $1m and $4.9m in investable assets.
“Those strategies that are outside the traditional realm of long-only equity and fixed-income may offer better diversification potential and the potential for enhanced risk-adjusted returns,” the report continued.
“Yet, they may also present an added level of complexity to explain to clients who have been unnerved by the performance of traditional assets. Compounding the problem are the misconceptions that clients hold about these strategies.”
According to previous information gathered by Natixis, many retail investors believe alternative assets to be more expensive, higher risk and inaccessible for individual investors.
It seems that advisers recognise this knowledge gap as 64 per cent told the survey that clients have little or no understanding of alternative investments, compared to 92 per cent of advisers who say they understand the role of uncorrelated assets within a portfolio.
Despite this, though, more than a third say they need to learn more about alternative investments themselves before introducing them to client portfolios.
“Educating clients on alternatives and their place in portfolio construction will be a critical mission for advisers as they look to address client risk concerns,” the report added.
