Traditional allocations at risk in the current environment
Portfolio manager Dynamic Asset Consulting has warned that financial advisers are putting their business and clients at serious risk by implementing traditional strategic asset allocation (SAA) portfolios, and that better active management was the solution.
Dr Jerome Lander, Dynamic Asset Consulting portfolio manager, said most Australian financial advisers were still operating client portfolios based on a view that interest rates would continue to fall.
“The new reality is that rates are bottoming out and can’t fall much further in a historical context, and if they do then mainstream asset prices are probably in big trouble anyway,” Lander said.
“In the US we are seeing the effects of abnormal policies, including big tech names like Apple and Tesla being thrown around on pure speculation in what is becoming an increasingly erratic asset pricing environment.”
The firm said SAA had been a popular investment strategy among financial planners looking to balance risk and return for their clients. This included a traditional approach of allocating 60% of assets to shares and 40% to bonds.
“The 60/40 portfolio split is now a very risky way to run a portfolio. I couldn’t sleep at night running a portfolio like that. There is an urgent need for action right now,” Lander said.
“The bubble is not actually just in equities as most people think – it is in bonds and traditionally defensive assets.
“We could be entering an environment where you get absolutely no return out of cash and bonds, and little on property and equities over time.
“We could also see bonds and their proxies get totally destroyed, particularly if we get stagflation.”
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