CFA UK is the professional body for investment managers – your scribe was awarded one of its qualifications in his younger life. It recently expressed some concerns about the impact on portfolio diversification of a long period of negative interest rates. It suggested advisers might want to look through the following checklist. If we take out the references to clients, it would be a good one for do-it-yourself investors to work through on their own account.
Are my client’s return expectations reasonable given the low expected future returns offered on many assets?
In light of the above, are my client’s current contributions (or savings) sufficient to meet their objectives?
Conversely, are some clients assuming too much risk in order to hunt for yield in a low return world? For example, are risks now higher than they were for traditional portfolios with high government bond weightings (my emphasis)?
When considering risk, what are the limitations of my risk model(s) in relation to the assets in which the portfolio is invested? Do they, for example, rely completely on historic correlation, volatility and drawdown data which may not hold in the future? How have I addressed those limitations, even if only qualitatively?
How long would it take to liquidate the client’s entire portfolio? How much would it cost do so? How do those figures compare with the past and is the level of exposure to illiquid assets still appropriate for the client’s needs?
As the hunt for yield continues, are my client advice and investment decisions accounting equally as much for the risk characteristics of a product/asset as its return potential?
I think the third paragraph is particularly relevant to those investors with passive multi-asset portfolios that are biased to fixed income stocks, like a Vanguard Lifestrategy 20% or 40% equity fund. The conventional risk control offered by owning long dated government bonds may well not hold good in the next few years
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