Tough market for advisers, but there’s a solution – AMM

Current market conditions are creating potential headaches for advisers who are conscious of their ‘best advice’ obligations. In these circumstances the best advice for advisers could be to look carefully at multi-management companies known for their asset allocation skills and which offer solutions that provide the necessary level of independence.

The tip comes from Johan Gouws, chief investment officer of Absa Multi Management (AMM) and an investment professional who recently toured the country to brief advisers on a market in which downside risks have begun to grow.

“Market conditions concern many advisers,” says Gouws. “If the market moves against a client within weeks of a significant commitment, human emotions can take over, endangering relationships.

“Many advisers are familiar with the FAIS-friendly aspects of multi-management. These considerations are especially important at a time when shifts in asset allocation can be crucial.

“Market timing shouldn’t be your worry. These concerns can be passed on to a multi-manager. Now’s a good time to do it as removing the potential risk and effort associated with selecting asset managers, mandate compliance and portfolio and manager reviews will allow for increased sales and client service time.”

The market situation is complex. Some feel local equities are close to full value. Yet cash offers a negative return net of tax and inflation. The bond market ticked higher after the last interest rate cut, but economic growth is picking up and rates traditionally rise when this happens.

Achieving the optimum weighting of asset classes has become a major challenge, says Gouws. Getting it right is critical as international research indicates that appropriate asset allocation drives up to 80% of portfolio results in the long run.

He notes: “Allocating fund holdings across various asset classes enables an asset manager to avoid the risk of being invested in an asset class that proves to be overvalued. The decline of investment values is then less dramatic.

“Limiting downside risk (also) results in the faster recovery of an investor’s portfolio value when markets turn positive.”

So get the mix right and you put a brake on any market slide while positioning yourself for a stronger, quicker rebound.

AMM believes each asset class has the potential to provide a specific real return at different levels of certainty over different time periods.

As the market cycle changes portfolio holdings are adjusted to increase exposure to the asset classes offering greater relative value. Profits are locked in by reducing asset classes in the portfolio that have entered overvalued territory.

In addition to asset class diversification, AMM, as a manager of managers, can access additional sources of diversification.

Gouws explains: “By combining different asset managers, AMM diversifies its portfolios across different investment views, styles and strategies.

“A well-defined manager-blending process allows AMM to construct and manage portfolios where each manager adds value in a unique way. By selecting the most appropriate manager for each component of a portfolio we reduce the risk of over-diversification through the duplication of manager efforts.

“This enables us to deliver a consistent investment experience to investors and, as advisers know, consistency is key for supporting relationships when market uncertainty threatens.”