Make the Grade With Portfolio Returns: A 3-Step Guide for Advisors to Rise to the Top of Class
Written by: Mark V. Petersen
It’s that time of year again. Kids of all ages—from kindergarten to college—are heading off to yet another first day of school. With new backpacks and fresh notebooks, most of them are all smiles…at least until the teacher assigns homework. And dreaded though it may be, every parent and teacher knows that homework and good study habits are the keys to success – it’s the preparation for coming tests. The student who knows how to carefully hone in on the details that matter most will rise to the top of the class.
The investment world has its own term exams and every advisor, broker-dealer, and due diligence officer knows the pressure of mid terms. Quarterly reports are your own “report card,” and today’s continued low-interest rate environment makes delivering coveted returns quite the challenge. Advisors must create client confidence to set themselves apart from “the competition down the street” and the roboadvisor of the day (no advisor can afford to be a commodity!). Broker-dealers need to provide their advisors with strong options that support that differentiation. And due diligence officers need to identify innovative, suitable alternatives to make it all happen.
So here’s the question of the day: Are you making the grade with your portfolio returns?
If you are, fantastic. It means you’ve found a way to balance risk, probably by embedding a good chunk of alternative investments into your portfolio to lower correlations and effectively hedge the general market trends and reduce risk, regardless of general market volatility. More importantly, it means you’ve found a way to achieve some very real differentiation.
But if your grades could use a boost, here’s a simple, 3-step guide to help you hone in on the most important details, choose the most suitable alternatives for your portfolio and, ultimately, rise to the top of the class:
1. Know what sophisticated investment platforms are looking at today.
One thing is for certain: they’re not following the trends. Instead, they’re looking at stable, non-correlated investments that offer unique growth opportunities and hedge market movement. In most cases, these forward-thinkers are seeking alternative funds that offer unique characteristics that have the potential to lower portfolio correlations and provide additional Alpha.
2. Look for investments that are capital constrained.
Years ago, I was on an American Airlines flight when the flight attendants handed everyone a brochure on mutual funds. I knew then and there it was time to get out of mutual funds! It was a sure sign that too much money was flowing into an investment strategy. While everyone’s ultimate goal is to “buy low and sell high,” even experienced investors fail to abide by the rules to make that happen. The surest route to failure: follow the trends. Instead, seek asset classes that are capital constrained simply because they haven’t yet become the next-best-thing. Opportunities for growth will be in your hand when the trend emerges—and the values increase—down the road.
3. Move beyond your checklist to consider non-traditional characteristics.
Strong financials, established processes and infrastructure, positive momentum, a consistent track record, and a great management team are important, but there are so many other factors that drive value, especially when looking at an investment opportunity. How a fund manager treats his or her employees can be a strong indicator of how they treat investors. What’s the company culture? Is there continuity as a team, or has the firm seen habitual turnover? Do the firm principals have “skin in the game”? Do they have enough confidence in the fund to invest their own assets? What is the investment’s Sharpe Ratio—not just its returns compared to the S&P 500? How have they weathered the past cycles? Use your own due diligence to pick the investments that can help you break away from the norm.
Like any homework, having some fun with it can make it seem less like work and more like play. Consider asset classes you’ve never thought about before. Aircraft leasing, royalty financing, and peer-to-peer lending have been making headlines lately, so they’re interesting to look at, but you may already be too late to the game when it comes to capital constraints. The most important thing you can do is to do your homework. Find the alternatives that are most suitable for your own portfolio and add them to the mix. It’s the best—and perhaps the only—way to truly rise to the head of the class.
Mark Petersen has over 25 years of experience leading distribution and sales efforts in the financial services industry. His background includes managing retail and institutional securities sales as well as national accounts, and he has forged strong relationships with broker/dealers and financial advisors throughout his career. Currently Executive Vice President at GWG Holdings, Inc., Mr. Petersen is also a registered representative of Emerson Equity. His previous roles include co-president of Behringer Securities LP and executive sales and marketing positions with CNL Fund Management, Franklin Square Capital Partners, and Madison Harbor Capital. He holds an MBA in finance from Baylor University and a B.S. in business administration from the University of Texas at Arlington.
Top Picks in Asset Allocation
Written b: John Bilton, Head of Global Multi-Asset Strategy, Multi-Asset Solutions
As global growth broadens out and the reflation theme gains traction, the outlook brightens for risky assets
Four times a year, our Multi-Asset Solutions team holds a two-day-long Strategy Summit where senior portfolio managers and strategists discuss the economic and market outlook. After a rigorous examination of a wide range of quantitative and qualitative measures and some spirited debate, the team establishes key themes and determines its current views on asset allocation. Those views will be reflected across multi-asset portfolios managed by the team.
From our most recent summit, held in early March, here are key themes and their macro and asset class implications:
Key themes and their implications
Asset allocation views
For the first time in seven years, we see growing evidence that we may get a more familiar end to this business cycle. After feeling our way through a brave new world of negative rates and “lower for longer,” we’re dusting off the late-cycle playbook and familiarizing ourselves once again with the old normal. That is not to say that we see an imminent lurch toward the tail end of the cycle and the inevitable events that follow. Crucially, with growth broadening out and policy tightening only glacially, we see a gradual transition to late cycle and a steady rise in yields that, recent price action suggests, should not scare the horses in the equity markets.
If it all sounds a bit too Goldilocks, it’s worth reflecting that, in the end, this is what policymakers are paid to deliver. While there are persistent event risks in Europe and the policies of the Trump administration remain rather fluid, the underlying pace of economic growth is reassuring and the trajectory of U.S. rate hikes is relatively accommodative by any reasonable measure. So even if stock markets, which have performed robustly so far this year, are perhaps due a pause, our conviction is firming that risk asset markets can continue to deliver throughout 2017.
Economic data so far this year have surprised to the upside in both their level and their breadth. Forward-looking indicators suggest that this period of trend-like global growth can persist through 2017, and risks are more skewed to the upside. The U.S. economy’s mid-cycle phase will likely morph toward late cycle during the year, but there are few signs yet of the late-cycle exuberance that tends to precede a recession. This is keeping the Federal Reserve (Fed) rather restrained, and with three rate hikes on the cards for this year and three more in 2018, it remains plausible that this cycle could set records for its length.
Our asset allocation reflects a growing confidence that economic momentum will broaden out further over the year. We increase conviction in our equity overweight (OW), and while equities may be due a period of consolidation, we see stock markets performing well over 2017. We remain OW U.S. and emerging market equity, and increase our OW to Japanese stocks, which have attractive earnings momentum; we also upgrade Asia Pacific ex-Japan equity to OW given the better data from China. European equity, while cheap, is exposed to risks around the French election, so for now we keep our neutral stance. UK stocks are our sole underweight (UW), as we expect support from the weak pound to be increasingly dominated by the economic challenges of Brexit. On balance, diversification broadly across regions is our favored way to reflect an equity OW in today’s more upbeat global environment.
With Fed hikes on the horizon, we are hardening our UW stance on duration, but, to be clear, we think that fears of a sharp rise in yields are wide of the mark. Instead, a grind higher in global yields, roughly in line with forwards, reasonably reflects the gradually shifting policy environment. In these circumstances, we expect credit to outperform duration, and although high valuations across credit markets are prompting a greater tone of caution, we maintain our OW to credit.
For the U.S. dollar, the offsetting forces of rising U.S. rates and better global growth probably leave the greenback range-bound. Event risks in Europe could see the dollar rise modestly in the short term, but repeating the sharp and broad-based rally of 2014-15 looks unlikely. A more stable dollar and trend-like global growth create a benign backdrop for emerging markets and commodities alike, leading us to close our EM debt UW and maintain a neutral on the commodity complex.
Our portfolio reflects a world of better growth that is progressing toward later cycle. The biggest threats to this would be a sharp rise in the dollar or a political crisis in Europe, while a further increase in corporate confidence or bigger-than-expected fiscal stimulus are upside risks. As we move toward a more “normal” late-cycle phase than we dared hope for a year back, fears over excessive policy tightening snuffing out the cycle will grow. But after several years of coaxing the economy back to health, the Fed, in its current form, will be nothing if not measured..
Learn how to effectively allocate your client’s portfolio here.
This document is a general communication being provided for informational purposes only. It is educational in nature and not designed to be a recommendation for any specific investment product, strategy, plan feature or other purpose. Any examples used are generic, hypothetical and for illustration purposes only. Prior to making any investment or financial decisions, an investor should seek individualized advice from a personal financial, legal, tax and other professional advisors that take into account all of the particular facts and circumstances of an investor’s own situation.
J.P. Morgan Asset Management is the marketing name for the asset management business of JPMorgan Chase & Co and its affiliates worldwide. Copyright 2017 JPMorgan Chase & Co. All rights reserved.
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