Despite decades of shared knowledge, one of the peculiar aspects of the financial services industry is there is no consensus on investment methodology.
This was the reflection of Portfolio Construction Form managing partner and dean Graham Rich as he ruminated on 50 years of investment research to the Professional Planner Researcher Forum.
“That’s what comes out when you’ve got artists playing a game with a clear theory and set of rules,” Rich said.
“That’s why we screw up all over the place, and that’s why we shouldn’t assume a whole bunch of things that we do assume.”
Rich started the first fund research business in Australia and New Zealand in 1983 and in 2001 left to start Portfolio Construction Forum.
“In 2002, we introduced the term ‘portfolio construction’ to the wealth community, and I can still remember lots of people saying, what on earth does that mean?
“Because the term wasn’t used, this whole notion of multi-asset, multi-manager wasn’t used [from] 2002 all the way through until it became part of the lexicon,” Rich said.
During the session, he expressed his view that “shared purpose makes for a strong community” and repeatedly referred to the idea of a common purpose.
Differing principles were a key reason for the lack of consensus amongst investment advisers and consultants.
“If we start with this purpose notion, and we think about where we’ve been, [it] is developing a set of principles, and it’s those principles that have us differ,” Rich said.
Rich used the metaphor of a sports game, such as soccer or rugby, to explain how investment advisers and consultants are all producing different outcomes within the same system.
“That’s how InvestSense does it differently from how Mercer does it,” Rich said.
“That’s how the game is played by different coaches who deliver different outcomes in different ways, but can potentially still stay within the rules of the game.”
Rich’s philosophical approach to portfolio construction was focused on deciding core principles that could be adopted by investment advisers and consultants across the board.
“All we need to do is know what we believe, grow what we know, and show and help others to grow.”
In Rich’s Multi-Asset, Multi-Manager Investing in Australia 50 years paper, he said that understanding the theories that underpin the finance discipline, and the supporting evidence is “critical to developing a set of core investment beliefs”.
“MAMMI [multi-asset, multi-manager investing] represents – for all to see – the true expertise of the investment portfolio construction professional,” Rich said in the paper.
“There are many, many moving parts, and many, many variables. And, when it comes to practice, not even the experts agree!”
Rich argued the key to MAMMI was “to learn the science, develop your philosophy, and practice your art”.
The paper says while diversification is often beneficial, particularly in reducing risk, spreading funds across different investment managers with distinct investment styles can result in overlapping styles diluting returns.
“Over-diversification can negate the advantages of active management by replicating an index-like performance at higher costs,” Rich wrote.
Other sessions at the forum discussed the proliferation of asset consultants in recent years. Conexus Financial editor-in- chief Aleks Vickovich asked Rich if he viewed it as a “meaningfully positive outcome”.
“It’s 100 per cent meaningful, but not as meaningful as we collectively think in this room,” Rich said.
“There’s a whole slew of private wealth firms who are running their own internal asset consulting business.”
Furthermore, there are advisory practices not using external consultants as they have “enormous competence” and “really significant capability internally”, Rich said.
“In terms of multi-asset, multi-manager portfolio construction in the wealth space, there are more and more participating in a commitment to continuing education and professional development. I see the asset consulting community as a critical group of experts for example, [in] portfolio construction.”
When asked how the industry can collectively provide some helpful guidance to the market, Rich said it would involve “challenging all participants in the ecosystem to lift their game”. He encouraged industry members to hold themselves to a high standard.
He also said the industry should encourage the Financial Advice Association to understand “the centerpiece of quality advice is investment”, arguing the association hasn’t presented enough investment content to members.
“There were some asset managers represented, some of you here, but was there fundamental investment content? No. It’s challenging all participants in the ecosystem to lift their game.”
For more information or a copy of the MAMMI report, contact Graham Rich at graham.rich@portfolioconstructionforum.edu.au
