Whether in business, investing or life generally, when circumstances change, we need to be able to adapt quickly. The COVID-19 pandemic has forced us to transform our family, social and professional lives in a matter of weeks while contending with the uncertainty of lockdown and social distancing measures. For trust-based businesses that rely on face-to-face interactions with clients, the transition to online meetings and remote work has been disruptive but manageable.
While COVID-19 is not the teacher we were looking for, we’ve learnt to adapt in the face of a global challenge that affects everyone, albeit in different ways. It’s not the strongest that survive, but those best able to adapt to environmental shifts and identify opportunities, even in a world of chaos. When markets enter a period of extreme volatility, investment managers need both discipline and the flexibility to respond quickly. Likewise, when a client’s wealth is on the line, advisers need to be there to provide reassurance, and be in a position to implement changes to the portfolio as soon as the need arises.
Many advisers Lonsec has spoken to have been surprised by their ability to transform their business practices seemingly overnight. Being able to adapt and pivot as a business is essential, and it’s no different in the investment world. For many advisers, however, making timely changes to their clients’ portfolios remains a challenge. This is where managed accounts can play a critical role in responding to market dynamics while giving clients confidence that their portfolio can actively manage risks and won’t be left behind when the market comes back.
Over the past two months, Lonsec has made a number of changes to its suite of managed portfolios and SMAs, ranging from asset allocation adjustments through to individual fund manager and stock changes. These changes have been made to further diversify the portfolios, manage risk, and take advantage of investment opportunities where there has been significant dislocation in markets and value has been identified. In such an environment, the ability to implement in a timely manner has been important as market dynamics have shifted quickly.
The managed account structure has facilitated the efficient implementation of these changes. In practice, the process of making an investment decision – from the time the investment committee meets, to the implementation of the changes, through to the communication of these changes to advisers – takes around two days. Compare this to the conventional process of making an investment decision, sending a Record of Advice (ROA) to clients, awaiting a response, and then implementing the proposed changes across your client base.
All this can take up valuable time. While managing these changes, advisers also need to focus on running their business and helping clients through a period where many may be feeling distressed as their finances come under pressure, their job security is at risk, or their retirement savings have taken a hit.
An example of the value of being able to implement in a timely manner can be demonstrated by a change to asset allocation Lonsec made on 14 April 2020. Lonsec increased the portfolio allocation to equities within our multi-asset and listed portfolios from a slightly underweight exposure to a neutral exposure, thus increasing the weight to risk assets. The allocation was funded from our alternative and cash exposures, depending on the portfolio. The investment thesis was driven by an improvement in asset price valuation metrics, improved liquidity in markets, and a reduction in some of the risk indicators Lonsec monitors. At the same time, we recognized that economic data is likely to be poor and there is still significant uncertainty around how company earnings will be affected by the pandemic.
However, looking forward over a three-year period, we believed a neutral exposure was warranted. Since the change was implemented, both domestic and global equities have risen, recouping some of the losses experienced in March. While we believe it’s almost impossible to time markets – and Lonsec doesn’t make short-term tactical moves – being able to implement investment views at the time a decision is made can be beneficial to clients, particularly in periods where market dynamics are changing quickly.
Like many things, we often recognize the value of something once things take a turn for the worse. When markets are going up and volatility is low, as was the case leading up to pandemic, portfolio implementation doesn’t rank highly in terms of importance. However, when markets begin shifting rapidly, the value of efficient implementation becomes all too clear, especially for advisers looking to maintain contact with their clients and communicate the benefits of their advice in a highly challenging market.