INVESTING AND TRADING The price of control – understanding the benefits of discretionary managed portfolios
Grant Meintjes Head of Securities PSG Wealth
A well-constructed investment portfolio can last for generations to come. Investing wisely can help protect your initial capital investment and grow it to levels that would not otherwise be possible. Deciding on your approach to managing such a portfolio is therefore a key consideration when it comes to ensuring it is robust enough to withstand volatile market environments. While discretionary portfolios hold many advantages, the idea of giving up control can be a difficult stumbling block to clear.
Two basic approaches to advised portfolios In the previous edition of The Wealth Perspective, I argued that a securities portfolio should be seen as part of your holistic financial plan. Once you have decided to incorporate advice on your share portfolio, the next question is how the merits of an advised approach to managing securities portfolios stack up compared to a discretionary approach, especially in a volatile environment. The difference in the approaches comes down to the extent to which you allow your adviser to make decisions on your behalf. • Advised portfolios: If you hold an advised portfolio, your adviser will first check any changes to your portfolio with you. They will share research with you – but will not make any changes unless you specifically instruct them to. On the positive side, this approach is highly engaging and supports relationships. The client is in the loop on every single decision – which can be a source of great comfort to some. However, this approach also requires the adviser to contact the client every time they want to make a change to the portfolio. This holds challenges if the client is not immediately contactable, or is not in a frame of mind to consider portfolio adjustments at that time. • Discretionary portfolios: This approach involves the client and adviser agreeing on an investment strategy and mandate upfront, allowing the adviser to act on that strategy without checking in with the client before every trade. The benefits are that the adviser or portfolio manager can take advantage of short-lived market opportunities, protecting the whole book or single shares in the portfolio, and reducing or eliminating the workflows for client communications and confirmations when adjusting portfolios. For this approach to succeed, trust between the parties, clear agreement on how often the adviser or portfolio manager will report back, and how success will be defined, are key.
manifest in the prudent management and efficient allocation of your capital. Clinging to the illusion of control can undermine this process, and effectively hamstring your wealth creation efforts. If properly executed, a discretionary portfolio will reflect your preferences and intentions. While you may give up control on individual trades, you retain control of the overall portfolio direction and composition.
It all starts with a good investment strategy Constructing a solid investment strategy is essential in building a successful discretionary portfolio management relationship. You don’t want to implement an investment strategy and find that you want to abandon it for some hot new trend you discovered in a magazine article. The collaborative process of developing an investment strategy involves carefully working through factors such as your longand mid-term objectives, your true attitude to risk and capacity for loss, and how any existing investments might be optimised or adjusted. Once your discretionary manager has a full picture of your financial circumstances and goals, they will then be in a position to create a portfolio that suits your needs.
Understanding your risk tolerance is key The perceived risk associated with securities portfolios is perhaps one aspect that makes investors feel the urge to keep a close handle on every trade. This is precisely why agreeing upfront to a diversified approach, and understanding your risk tolerance, is so important. Risk comes in many different guises, and while shares tend to be fairly liquid investments, this is not always the case.
Giving up the illusion of control For many investors, giving up control seems like a huge leap of faith. One of the mental shifts investors need to make is to understand that an investment portfolio itself does not necessarily offer an advantage. Rather, the potential benefits
For many investors, giving up control seems like a huge leap of faith.
FIRST QUARTER 2018
INVESTING AND TRADING
Diversification and limiting concentration risk Diversification into multiple asset classes will help to protect an investor’s capital if one segment of the financial markets does not perform well. In our share portfolios, the diversification approach is supported by our portfolio committee that also provides guidance on the maximum exposure discretionary managers may allocate to a single share in a portfolio. Despite all the bad news around Steinhoff, for example, our discretionary managed clients were protected against major concentration risks as, at worst, only a small portion of their overall portfolio would have been exposed. By contrast, on an advised portfolio, an adviser will execute a trade as instructed and a DIY investor has no-one to constrain their actions.
The diversification and risk controls offered by a discretionary manager may add to the robustness of a portfolio, while the control offered by an advised or a DIY portfolio may come at a hidden cost.
To unlock a share portfolio’s potential, consider your long-term goals Investors should carefully weigh the advantages and disadvantages of different management approaches when it comes to managing their securities portfolios. The diversification and risk controls offered by a discretionary manager may add to the robustness of a portfolio, while the control offered by an advised or a DIY portfolio may come at a hidden cost.
FIRST QUARTER 2018