Actively-managed portfolios for superior returns

“Sell on bugles and buy on cannons. Timing the market is impossible, time in the market is crucial. Buy when everyone else is fearful, and sell when everyone else is greedy.” – Warren Buffet

The last five years have been extremely challenging for investors and wealth managers as heightened volatility in markets has led to investors not achieving desired returns. One of the key lessons has been that markets are not driven by fundamental factors alone, but are reflections of the collective emotions of all the participants.

In this backdrop, wealth managers have walked a tightrope. They are expected to not just give advice on asset allocation but also help with security selection across various asset classes. Their advice, however, can conflict with investor sentiment.

That is what leads to huge gap between the advice that is given to investors and their actual execution. This gap between advice and execution can lead to sub optimal portfolios and consequently returns.

Now, how does this gap arise? The following could be the reasons:

There may be insufficient data available to support the advice. This could be leading to lack of investor confidence and insufficient measurement systems for the results.

It could be that the strategy is sound. But it is not communicated in a way that clients can easily understand. Therefore they don’t see what action needs to be taken and when.

There is simply no clarity about who is accountable for ensuring execution. This can lead to missed opportunities.

How to bridge it?

Knowing all this, how does one close the gap between advice and execution? To close the gap, the following steps need to be followed:

Define strategies and align tasks/people to it – in other words define roles and responsibilities clearly so that there is no lack of clarity on who has to execute.

Provide compelling advice – so that investors are ready to buy the idea on the spot

Streamline operations. Build automated processes to implement ideas

Investors can also solve this problem through managed solutions.

A few advisors offer discretionary multi-asset class solutions which have the ability to straddle across asset classes and individual securities depending on the view on markets. The basis of such offerings is “Asset Allocation.” Historically, we have seen that different asset classes perform differently and that performance within sectors and across varied market capitalisations tends to diverge.

Hence, one needs to allocate money across different asset classes but in a scientific manner.

Most studies also suggest that the asset allocation decision (which classes to invest into and at what weights) is very important. In fact, 92 per cent of return variability is explained by asset allocation.

Managed solutions help to reduce the gap between advice and execution. This is most suitable for professionals who cannot actively manage their portfolios due to time or work constraints.

Managed solutions allow portfolios to be actively managed by advisors.

It also makes the advisor responsible and accountable for the advice being provided. Hence, in an active market environment like today the importance of such solutions is growing.

(The author is Head - Investment Advisory, Motilal Oswal Private Wealth Management.)

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