Advice firms need to be looking for other ways to diversify their clients’ portfolios over the next 10 years as the typical pairing of equities and bonds no longer deliver uncorrelated returns, according to Marcel Bradshaw, head of UK Retail at Orbis Investments.
“We’ve been saying for a while that the next 10 years are not going to deliver in the same way that the markets have in the extended bull-run we’ve experienced since 2011,” he says.
Bradshaw sees both stocks and bond as generally expensive and believes passive investments cannot be expected to deliver in the way they have over the past decade; while inflation is already higher than the returns being offered on bonds, he points out.
“Advisers now need to be thinking how to position their clients’ portfolios with diversification outside of the 60/40 split which is no longer fit for purpose,” he says.
True diversification is holding elements in a portfolio that will perform well when other parts of the portfolio are not performing to plan. But it can be difficult to operate this strategy and explain it to clients when markets are doing well – recency bias from the last 10 years creeps in, he says.
“So many investors now have portfolios which are overweight growth and following indices where it is a handful of stocks that have been pushing up the index, which creates concentration risk,” Bradshaw says. Hence, diversified portfolios may not be as diversified as advisers think.
What’s needed going forward, he says, is to avoid long-term government debt, and have parts of the portfolio that are “very different to the index, to avoid the expensive parts of the market.”
Bradshaw says advice firms also should look at the multi-asset funds in their client portfolios and see exactly where they are invested. “Multi-asset suggests they are different in their make-up, but this isn’t always so; a look at their top 10 will quickly show how correlated they are.”
With its eye to the future Orbis has no long-term government bonds in its portfolios, preferring commodities, like gold, inflation-linked bonds, and actively picked stocks providing value. The fund manager also hedges out the stocks it picks. “If we bought BP, as an example, we would hedge out the FTSE 100. Then if BP went down 5% and the FTSE went down 10%, our alpha is 5% and we make that gain. Likewise, hedging can be used when stocks rise, and of course it can work against us. But the important point is that this makes it totally uncorrelated with the rest of a portfolio.
“We don’t know what is going to happen except that we know there will be change. When and how much we will have to see but it makes sense for advisers to allocate a proportion of their clients’ portfolios to funds which are uncorrelated with their main strategy and so positioned to account for and do well in that different future.”
