More context less clutter in portfolio design

One thing missing from portfolio construction is the ability to meaningfully translate the impact of macroeconomic conditions at an asset and a fund level for the end investor.

More context less clutter in portfolio design


For those who are not yet doing so, this may give you a gentle nudge

Clear communication

With the Investment Association already on board, thanks to their proposals for outcome-based fund sectors, what is missing is how the fund groups talk to the client, either directly or via a wealth manager, adviser and/or platform, about the potential, future performance of their fund/portfolio.
The current language is backward-looking and all about past performance, showing graphs and tables of how the fund has done against a particular measure over a particular reporting period.
What fund groups are not doing yet is giving the investor any suggestion of how their fund is positioned for the future – how will the fund do if interest rates rise? Or if the sterling strength starts to diminish?
What portfolio managers are not able to do is demonstrate how good they are at running money, against a client-defined objective, compared to other portfolio managers unless they run a multi-asset proposition within a regulated fund structure when the comparative information – still backward looking – is at least available on FE Analytics, Morningstar Direct and so on.


Looking ahead, as more and more advisory businesses look to outsource investment decisions to wealth managers, I would not be surprised if the regulator ‘encouraged’ portfolio data to be more openly available and a direct comparison easier to make. Otherwise, how does the regulator know that advisers have all the relevant information to hand to put their client money with the right portfolio manager?
What is needed is a combination of data-driven, forward-looking analytics using expert, independent, academic views to help frame an asset’s behaviour given their outlook for economic conditions at the time an investment decision is being made.
What is also needed is for this to be displayed in easy-for-the-investor-to-understand graphs and pretty pictures (so there is little point including Sortino, Sharpe, R2 ratios and the like) with any copy in plain English that puts potential performance into context.
An investor is then able to put the choice of investments available in some sort of context, not with a benchmark, or an index, or even a peer group, in a language they understand – the impact of inflation, interest rate rises, or the cost of holidaying abroad.
Parala Capital does part of this, having designed a proprietary model (AlphaPredictor) using the expertise of industry practitioners and academic researchers that aims to “identify future outperformance and underperformance of mutual funds, hedge funds and a range of other financial assets.”

The best investments across economic cycles

In its own methodology, the firm sticks its head well and truly above the parapet, saying: “Because Parala understands the relationship between macro-factors and markets it can identify the best investments across economic cycles.”
The individual components of forward-looking quant research, sophisticated analytics and technology are already available; the trick will be for an organisation to combine all three and allow end-to-end communication between the fund group and the end investor using language that is easy for the investor to understand.
Not that I’m giving any secrets away, but there is a new business, PureGroup, that is looking to do exactly this and I wish them the very best of everything – they deserve to succeed.


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