The Covid-19 shockwaves that sent markets tumbling earlier this year offered a remarkable demonstration in how model portfolios can quickly rebalance, protect investors and even take advantage of fast, and unexpected rebounds.

Jason Petersen, head of wealth management at 5 Financial, was stunned at the speed with which his model portfolios rebalanced during the sharp selloff, and how they managed to scoop up depressed equity & fixed income assets on the way back up.

“When the equities market dropped dramatically earlier this year, our 50/50 portfolios rebalanced really fast, which was in line with our investment philosophy to help clients stick to their path despite market volatility,” Petersen says.

“But rather than just sitting there and waiting, the rapid market turnaround meant we were suddenly buying at depressed prices, not because we’re cleverer than anyone else, but because the models were following that same philosophy that BlackRock incorporate into their actively managed model portfolios.”

“It might sound strange but for our clients, coronavirus was almost a positive, and added something like four to six per cent back to the clients’ portfolio as a result of the rebalance.”

Automated rebalancing

Model portfolios have gained in popularity in recent years. They allow investment managers to take advantage of a professionally researched mix of managed investments and various asset classes to achieve the requisite diversification for their clients.

Once an investment adviser has determined the clients’ goals & chosen the appropriate model portfolio, the portfolios rebalance automatically according to the model managers process & investment philosophy. This automation of rebalancing all client portfolios reduces the administration and compliance burden for these investment advisers, who can instead focus on managing client relationships and aligning their goals with their financial reality.

When a shock like Covid-19 sweeps through markets, investment advisers are stretched thin trying to calm clients and assure clients to stay the course and withstand the ructions.

“The key is to build portfolio resilience and try to mitigate conditional environments, especially when everyone is taken by surprise like they were earlier this year,” Josh Persky, head of model portfolio solutions at BlackRock Australia, says.

“When there’s a dislocation in markets, it can take an enormous amount of work for investment advisers to respond on behalf of every single client.”

The automated rebalancing of BlackRock’s multi-asset class SMA was one of Petersen’s main attractions to the technology, which 5 Financial implemented into their financial advising business in 2019.

“Rather than being knee deep in manually rebalancing portfolios when the market drops, or writing records of advice, we had time to get on the front foot with clients and explain what was going on,” Petersen says.

Communicate during times of trouble