Navigating difficult allocation discussions with clients

Private wealth manager Escala Partners has shared the difficult conversations that advisers need to have with their clients as strong sharemarkets prompt a rebalance.

Escala investment adviser and partner, Ed Brooke, said investors need to understand the defensive portion of their portfolios, such as cash and investment-grade bonds, given their importance in protecting portfolios against market volatility. 

“The key message for our clients is to be diversified so that your investment portfolio can do well in a lot of different scenarios. And make sure you understand what’s in the defensive part of your portfolio. Because that’s what will matter most if things do turn around – you don’t want to see the defensive part of your portfolio down 15 per cent when equity markets are down 30 per cent.

“We typically use corporate bonds as the anchor in portfolios either through direct positions, good quality funds, or a blend of the two. The key is to avoid over concentration in this part of a portfolio and understand how the portfolio will perform during times of stress.”

Escala’s asset allocation framework typically advocates around 30 per cent in diversified alternatives, 30–35 per cent in defensive assets such as cash and investment-grade bonds, and about 35 per cent in equities with a global tilt.

With equities having pushed ahead of their target allocation a result of strong sharemarkets, he also urged advisers to rebalance and bring it down to a neutral positioning. The ASX 200 has returned 8 per cent over one year, while the US S&P 500 has returned 16 per cent.

Moving an allocation down will help portfolios to avoid too much overconcentration, he said, and is vital even if the client disagrees and wishes to stay in an outperforming asset class.

“I’d say the hard conversation is when you talk about Australian equities, and it’s up 20 per cent year-to-date, and we want you to diversify into some assets that are up 10–12 per cent year-to-date. So that conversation can be interesting.

“It’s better to start reducing now and rotating into some of those asset classes that will, likely, over the next five years, provide a much better risk return.”

He also found clients are typically comfortable to sacrifice some liquidity by turning to alternative assets such as global private debt, private equity, hedge funds, and uncorrelated strategies like royalties which are generating strong risk-adjusted returns.

Escala Partners is part of Focus Financial Group, which recently promoted Travis Danysh as chief strategy officer to focus on its expansion in Australia. In the role, he will be responsible for the development and execution of Focus’ long-term strategic plan as well as its M&A and portfolio consolidation efforts.

Michael Nathanson, chief executive of Focus Financial Partners, said: “The Australian market is important for us, and as we continue to align our company across the markets and clients we serve, we see great opportunity in facilitating the convergence of our Australian operations into a cohesive business that can operate with all the capabilities and resources of a scaled organisation.”

Earlier this year, it launched an end-to-end investment platform to strengthen its alternatives capability. The platform is designed to streamline operations and enhance the investment experience and set up in collaboration with fund management group One Investment Group. 

The platform will offer bespoke solutions to optimise operational workflows, including document processing, onboarding, subscriptions, performance reporting, tax management, investment calls, and distributions processing.