Life coach and founder of Personal Excellence, Celestine Chua said that “Fear, uncertainty and discomfort are your compasses toward growth.” Right now, fear, uncertainty, and discomfort are rife. The COVID-19 pandemic and the ensuing global lockdowns have been a massive burden on society and, as Nolan Wapenaar pointed to in his recent article entitled Lockdown, Treasury’s supplementary budget and your investments, the brunt of this burden is felt by the impoverished and the disadvantaged. This has intensified social justice movements, which have, in turn, led to protests in some countries and between people it has led to difficult, but important, conversations. The world seems to be in a crisis and people are confused, and angry. Whilst there is so much beyond our individual control, what we can control is our own thoughts, behaviours, and actions.
Yes, it is difficult not to become bogged down by negativity and in Tamzin Nel’s article entitled Focus on the Facts, she explains that “we are tired of being bombarded by a stream of never-ending negative news”. This piece was written in 2019 and little did we know how much fear, uncertainty and discomfort was still to come in 2020. We need to learn about the reality of a situation by focusing on the facts and listening to and taking advice from those people who have superior knowledge to us in certain circumstances and surrounding certain issues. We can control what we consume and, as a result, spend more time thinking about how we behave in response to those thoughts.
Instead of drowning in a never-ending stream of negative news, we need to learn how to swim and steer ourselves on the right course (sometimes with the aid of a compass). To this extent, whilst we cannot help you navigate all of life’s difficult journeys, your financial solutions start with a conversation and we can be your financial compass.
Everyone is unique and has different financial or life goals. There is no True North to navigate towards. Instead, at Anchor, we aim to find your North or end destination, that will make your financial journey a success.
I am currently studying towards the Level III CFA Examination and, whilst revising the course content, I realised that, as portfolio managers (PMs) and wealth managers (WMs), at Anchor we have been making use of a tool known as situational profiling, which considers an individual’s preferences, economic resources, goals etc., without giving it the benefit of a formal title.
We believe that it has benefited our initial proposals and ongoing implementation of our clients’ investments. Situational profiling begins with determining an investor’s source of wealth and their perceived measure of wealth vs their actual needs and their stage of life. This provides WMs or PMs with insights into their client’s risk tolerance and return objectives in order to set and keep our clients on the correct path towards their end destination.
The first step is determining a client’s two main objectives – return and risk tolerance. Return can be further broken down into two types – required and desired. The WM then has to determine what is most important to the client, while still considering the facts presented and whether such a return is indeed attainable. In terms of a client’s risk tolerance, the WM needs to address both a client’s ability and their willingness to take on risk. A client’s ability is determined objectively by the WM, whereas their willingness is a far more subjective and emotional matter. The WM is then required to determine the importance of the client’s goals by considering the consequences of not meeting these goals. This can be one of the most stressful situations, especially in a volatile and unpredictable market. However, we believe that, once a structured plan is in place for a specific client, it is much simpler to stick to the plan and remain invested instead of panicking and changing course in these situations.
There are a couple of other constraints that need to be considered in conjunction with a client’s risk and return objectives. These can be summarised according to the following broad categories: time horizon, liquidity, tax consideration, legal and regulatory factors. It is very important to keep in mind that, the more information your WM has about your unique circumstances, the better they can assist you in reaching your financial goals
The first constraint – time horizon – is often the most important, as it can largely affect an investor’s ability to bear risk. Time horizon is defined by a liability or cash flow to be paid or a goal to be funded at a future date and therefore should be viewed in multiple stages. The client’s asset allocation must consider differing time horizons as defined by each liability or goal, as well as be adaptable to a changing mix of assets and liabilities, as time passes.
Liquidity, which plays an important part in a client’s ability to bear risk, is based on the client’s capacity to meet both foreseen and unforeseen cash flow needs. The key to successfully addressing liquidity constraints is to integrate the needs of the client and the characteristics of the asset class. The WM would need to consider different requirements for the various portions of an individual client’s investable funds. If, for example, a client has a requirement to pay for a child’s tuition eighteen months from now, or requires a monthly cash payout from their investment, these shorter-term goals and cash flow requirements mean that such a client will be invested in a more flexible, income type of investment product to avoid equity market volatility. However, the balance of the client’s funds might only need to be accessed in thirty years’ time, consequently the WM’s approach to investing that client’s funds will be different and the funds can be invested in equity provided that the client’s willingness to tolerate risk matches their ability to take on risk.
Tax constraints are extremely important considerations and because Anchor PMs and WMs are not tax advisers, we refer our clients to those with a superior breadth and depth of knowledge. We have a dedicated tax specialist within Anchor, or we will work closely with your appointed tax advisor.
Legal and regulatory constraints typically pertain to tax relief or the complex issues of wealth transfer across generations. We can offer qualified and expert advice through working closely with the Anchor Family Office at RCI to make sure that your investment structures are as appropriately allocated as your underlying investments.
We are all unique and, as such, each person has distinctive circumstances which might not have been previously covered in any of the other, broadly summarised constraints discussed above. As WMs, we need to consider information such as concentrated equity holdings from previous investments or a reluctance on the part of a client to invest in certain investments for personal, social, or political reasons.
Once your risk and return objectives, alongside your individual constraints, have been thoroughly discussed and documented, your Anchor WM will help ensure that your personal goals are consistent and reasonable with capital market expectations. It is of vital importance that a feeling of trust, common understanding and expectation should be achieved between a client and their WM.
Capital market expectations are the risk and return prospects of every investable asset class. The Navigator provides investors with Anchor’s quarterly house view on our capital market expectations for the various investable asset classes. As outlined on page 4, this view is based on Anchor’s estimates of the risk and return possibilities of each asset class. The Navigator also delves deeper into the reasoning behind our outlined strategy and asset allocation. Your WM will then determine the most appropriate asset allocation for you, taking into consideration your personal risk and return objectives together with our capital market expectations.
The above is done strategically. Strategic asset allocation refers to the long-term target allocation for each asset class, whereas tactical asset allocation is more of an active management strategy, based on perceived short-term opportunities. We believe that strategic asset allocation should be considered one of the most important decisions in the portfolio management process.
Strategic asset allocation combines capital market expectations with an investor’s long-term investment policy needs but, as Darryl Hannington wrote in his article entitled Invest(ing) in the other 99%, “Investing is not a proposal and implementation thereof, but rather an ongoing journey.” With a constantly changing world, rebalancing and constant monitoring of client portfolios are of the utmost importance to make sure that a client’s desired strategic policy needs are continuously maintained. Adjustments to a long-term strategic asset allocation is known as tactical asset allocation, which attempts to take advantage of short-to medium-term changes in capital market expectations.