In Verve’s recent whitepaper with M&G, they explored how the definition of multi-asset investing needs to evolve. This article builds on that theme, with Investment Specialist Grant Callaghan examining why client behaviour continues to favour cash, and what paraplanners can do within portfolio construction to address it.
People continue to prefer cash ISAs over investment ISAs: HMRC data for 2023/24 shows that more than 2 million people deposited £69.5bn in cash ISAs, versus 238,000 depositing £31.1bn in investment ISAs.
Advisers, product providers and personal finance groups continue to bang the drum for the use of investment ISAs over cash ISAs, yet the numbers show that preference for the cash option endures.
We know awareness is improving and we know that with the wealth (pun intended) of knowledge available, it is not a lack of information that is causing this mismatch. Investor behaviour and the psychology around investing is likely to be the main driver of this.
Research suggests that investors:
- Monitor their portfolio more frequently during volatile periods
- Become more risk averse when negative media dominates
- Are more likely to sell during drawdowns
Asset allocation
One of the ways to help clients in this scenario is through portfolio construction and asset allocation, with the aim of limiting the extent and frequency of these drawdowns.
Diversification has always been the best way of achieving this. Traditionally this takes the form of an equity/bond mix that aligns with certain investment goals and appetite toward risk.
We’ve tended to see problems with this approach over the last few years.
The first problem has come in volatile market conditions making equity and bond returns more correlated with each other, rather than less. 2022 saw the benefit disappear entirely as both equity and bonds fell in value.
The second problem is the concentration within the equity component. Equity allocations in portfolios tend to be based on global market cap, and the relative growth of the US market has meant that over 70% of the MSCI world index is allocated to this market.
In fact, 8 US companies now make up more than 25% of the entire index. This is not quite what people have in mind when they speak of creating a globally diversified portfolio.
Alternative assets
One way to solve this is to bring in alternative assets. Portfolios could include exposure to physical property, infrastructure, private equity, private credit and real assets/commodities.
Bringing in assets with less historical and expected correlation to broad equity or fixed income assets could provide two major benefits:
- Limit the extent of any future drawdowns
- Improve performance across all market conditions
The big limiters on introducing this kind of ‘multi-asset plus’ approach have been cost, complexity and inability of access.
The work on introducing private market assets to the retail public is helping solve the access issue. This is in turn making it easier to access pre-packaged multi-asset funds which is helping solve the complexity issue.
Cost is typically going to remain a factor, but it need not be as big as it might have once been as there is a general toward lower charges all round.
Existing options
In part of our whitepaper, we looked at how the PruFund provides a higher level of multi-asset exposure to investors and they do this while still offering a cost structure which is much more in tune with typical actively managed options.
The PruFund, as we highlight, has around one third of assets invested outside the domain of typical equity/bond allocations.
With the fund coming to a range of platforms in the very near future, this fund offers one major example of an option to create a more truly multi-asset structure for client portfolios, whether that is on a standalone basis or as a ‘satellite’ to another portfolio.
Conclusion
With no signs of external market conditions leading to less volatility, it may pay to consider creating a more multi-asset structure for clients.
This can make the job of keeping clients invested easier and help avoid clients becoming their own worst enemies.
This article builds on the themes explored in our whitepaper with M&G on redefining multi-asset investing.
If you’d like to explore the research in more detail, including structural analysis of diversification, access to private markets and implementation considerations, you can download the free whitepaper here: Verve and M&G Whitepaper.
As paraplanners play an increasingly central role in portfolio architecture, understanding how multi-asset is evolving may prove critical to closing the gap between client comfort and client outcomes.
Main image: technical, pattern background, ferdinand-stohr-NFs6dRTBgaM-unsplash
