Wealth Model Illustrative Portfolios
7 June 2022
If you are a wealth manager or an independent financial adviser then you will be interested in a range of model portfolios that have been developed by LCP.
Dan Mikulskis who is a friend and a leader in the specialist private wealth team within LCP asked the simple question:
How would we like our own portfolios to be invested given a blank canvas on investment strategy and allowing for a range of different risk appetites?
The answer to our question had to be practical – for example – we could only invest in asset classes where we could also identify a highly-rated investment manager with an accessible fund that is also rated highly and has low fees. In short, we had to be able to actually implement the portfolio.
If you are an IFA, then we think the ideas underlying these portfolios could help your clients achieve better outcomes. Why not take a look and compare them to your current model portfolios?
Having carefully designed these portfolios, we have then produced factsheets which describe what they are seeking to achieve. These factsheets are available to download for free.
Anyone involved in the process of building investment portfolios will have heard of Harry Markovitz because he is the father of modern portfolio theory, and his golden child is the efficient frontier, which we have used to design our portfolios. Harry famously said that diversification is the only free lunch in investment, but LCP is also offering these factsheets for free.
However, do not let the fact that they are free diminish their importance in your mind as they are the culmination of years of research and software development by an award-winning investment consultancy and as such, modesty aside, they are a great example of how much value can be added by having LCP on your team.
In developing these portfolios we’ve been guided by three principles that capture timeless investment wisdom (but which can often be forgotten in the heat of battle):
- SIMPLICITY: don’t be afraid to suggest simple solutions when these fulfil the objectives just as well.
- KEEP COSTS LOW: the total underlying fund manager fees for the portfolios are around 0.3% pa, well below that of typical model portfolios, which simply leaves more money in the hands of your clients.
- DIVERSIFICATION: we look globally in all asset classes, and bring in ideas like real assets and growth credit (eg emerging market debt) where they can help.
Putting these principles into practice gives us a simple and elegant portfolio structure which is born of:
- thousands of hours of research into appropriate asset classes for all of LCP’s clients invested around the world;
- our experience in controlling costs and risks by seeking out good sources of “beta” such as equity exposure and credit risk;
- our team of experts carefully building forward-looking models based on historical data to determine assumptions for expected returns, volatility and correlations, calibrated to current market conditions;
- and finally, we use LCP’s proprietary software to create the most efficient forward-looking portfolios possible using modern portfolio theory.
As with any portfolio design, efficiency is the key to why these portfolios are optimal. An efficient portfolio will maximise the future expected return that you can achieve for a given level of risk. In other words, an efficient portfolio will make your money work as hard as it possibly can to generate investment returns while only taking investment risks that you can afford to take.
I suspect Harry was going for a simple and catchy phrase when he said “diversification is the only free lunch…” because I believe “efficiency is the only free lunch in investment” is a more accurate statement but he may not have captured the imagination of the Nobel prize committee with his increased accuracy.
The only problem with efficiency is that it can be fleeting and illusive and no matter how amazing and well defined your portfolio of assets is it will gradually drift away from the efficient frontier over time because the asset allocation will deviate, the underlying (and all important) investment objectives may change over time and perhaps mostly because market conditions will change and evolve.
Therefore, to remain efficient it is good to have someone like LCP keeping an eye on all these key factors for you. The potential rewards of increasing efficiency are enormous because they compound over time. When I meet a new client it is rare that they have a fully efficient portfolio and so in most cases the expected returns (for a given level of risk) can be boosted.
So enjoy a free lunch on LCP and call us if you would like to understand more about portfolio design or how these portfolios could be implemented in practice.