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Business Review 2006 from
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A question of balance
Nick Lee
Ashburton's director of investment and fund management
IT is widely acknowledged in the investment industry that over 80 per cent of value is added to a client's portfolio through asset allocation, with the balance coming from stock selection.
Creating the perfect blend of stocks, bonds, cash and currencies has a greater impact on overall performance than individual security selection. Diversification reduces overall risk.
Only active, non-formulaic management of a portfolio will ensure consistent performance. This thinking has to be part of an overall investment philosophy and fund services and other investment products ought to be developed with these principles in mind.
Investment managers should strive to minimise risk at all times, while working hard to generate safe and steady growth for investors. To do this, it is vital to understand a client's propensity for risk. No two investors are the same. Everyone has their own unique needs, aspirations and risk appetite.
Risk
There is no such thing in life as a free lunch. Remember everything has a cost, hidden or otherwise. In the investment world, the cost of performance is risk.
Everyone loves the idea of making pots of money in the markets. However, the lesson of history is that risk and reward go hand in hand and most people don't like risk. So the key to successful investing is exposing yourself to enough risk to generate a satisfactory return, but not so much as to give rise to sleepless nights. A disciplined approach restricts the risk and reduces the exposure to volatility in the marketplace.
It is very important to get the risk balance right. Diversity is key and being in the right asset at the right time is essential for growth and allows for flexibility with investments. Asset allocation needs to be actively managed. Moving into markets that are out of favour and attractively priced and moving out of popular dearly priced markets.
For example, at Ashburton, as a rule of thumb, no more than 50% should be invested in equities, no more than 50% should be invested outside your base currency and no more than 70% should be put into bonds. A portfolio should not remain unchanged over time, as investing in one asset class year on year will just result in any rise being counter balanced by falls. If you diversify the make-up of a portfolio you can achieve good positive growth results over the long-term.
Another very important factor to note is the consistent relationship between the investment manager and the client. Products and investment styles will come and go, often in a cyclical manner, but no one should lose sight of the significance of the relationship with the client. Generally, investors have similar aspirations to preserve capital, minimise risk and volatility and achieve consistent results.
They, therefore, look for an investment manager who can deliver that mix. Obviously performance track records are important but, equally, so is the direct and personal relationship of trust built up between the client and their investment manager.
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