When it comes to Centralised Investment Propositions, advisers are operating in a challenging environment with regulations, economic uncertainty and individual clients’ needs and objectives to take into account.
Kirsty Ross, Senior Investment Proposition Manager, talks us through the investment challenges facing advisers and how you can find sufficient growth for your clients whilst guarding against volatility.
What are the key things an adviser should consider when building and reviewing a CIP in 2020?
Kirsty: Advisers are operating in quite a challenging environment when it comes to CIPs; there’s a lot of regulatory focus on client needs and objectives. So, one of the core things that advisers are going to have to focus on is how the advice they are giving takes those needs and objectives into account. From a pensions point of view one of the hot topics, at the moment, is around the separation between pre-retirement and post-retirement and the different objectives and needs that each can drive. That is something that advisers are really going to have to take time to understand, particularly in the context of their own client base. Once they know what the objectives are that they’re trying to achieve, they need to think about the investment environment.
In to 2020, what I think we’re going to be experiencing is relatively low growth, and potentially some quite high risk, there’s a lot of uncertainty in the market at the moment. So, advisers really need to think about how they can build a robust investment proposition that is going to survive and thrive in that kind of environment. If that’s not challenging enough, there are other considerations, so you’re going to have to think about value for money and evidencing that for both clients and the regulator. In light of some of the events and headlines that have been going on in 2019, I think there’s going to be a much greater focus on governance and transparency with regard to investment propositions.
So, in this challenging environment, how can advisers find sufficient growth while guarding against volatility?
Kirsty: They really need to be thinking about how their clients are adequately rewarded for the amount of risk that they are taking. There’s a commonly used economic theory called Modern Portfolio Theory and the fundamental hypothesis there is that you can use diversification as a tool to remove some of the risk from a portfolio without necessarily removing some of the expected return. So what advisers are looking for is a portfolio that maximises the amount of return that they’re expecting for a given level of risk.
In terms of how they do that, diversification is key, and they might want to look to a broader range of assets than the traditional equities and bonds; they might want to look at different asset classes such as property or commodities.
What part can those illiquid assets play in multi-asset portfolios?
Kirsty: Illiquid assets have a really important part to play in multi-asset portfolios. They are good diversifiers. Property is a really good example; it’s a great diversifier against some of the alternative growth asset classes like equities, so in the long term the dynamics might be similar but in the short and medium term the dynamics are slightly different. The other thing to think about with illiquid assets are that there are slightly different risks to consider, so think about liquidity risk. Now, in the pensions space, certainly in pre-retirement, and a lot of the time in post-retirement as well, investments aren’t going to be touched for 10-15 years or even more, so I think that being rewarded for taking on liquidity risk for those types of investors is potentially appropriate.
ESG factors are becoming more and more important, what should advisers be looking out for when recommending these types of investments?
Kirsty: ESG factors are going to certainly become more and more important when you’re thinking about a CIP. It’s an interesting consideration because each individual is going to have a different opinion about what ESG means to them and how important it is to them. It’s a wide spectrum, some people won’t have thought about it, or they might have decided actively that it’s not something they want to take into consideration. On the other side of the spectrum you have people who think it’s the most important factor to consider and may even be willing to sacrifice some returns in order to ensure that their investments are managed responsibly. Then, of course, there is everything in between. I think that the way the world is going at the moment investors are going to care about this, so it is up to us as an industry and for advisers to think about how and to what extent we embed ESG into the overall decision making process.