London, Aug 15, 2012 – (ACN Newswire) – Modern portfolio theory incorporates all realistic factors that are useful for clients to have a tailor-made solution that addresses their needs, says Erik van Dijk, Principal, LMG Emerge. However, taking client preferences on board at an earlier stage would help investment consultants achieve a better risk/ return profile for their clients, he adds.
A speaker at the marcus evans Investment Consultants Summit 2012, in Noordwijk aan Zee, The Netherlands, 3 – 4 September, van Dijk provides his insights into how an efficient investment portfolio can be achieved.
- Why do you think modern portfolio theory and risk-return optimisation needs to be rethought?
During my research with Harry Markowitz, we realised that what were said to be constraints were in fact clients looking for tailor-made solutions. By knowing these existing preferences and taking them on board at an earlier stage, having them as a starting point, a better risk/return profile can be achieved.
We also encountered the actuality that risk and return were based on abstract criteria or formats that were too rigid and did not really help when trying to derive good estimates, therefore we adjusted the theory to accommodate clear factors, such as instability, differences in data per market and market cycles. The solutions offered are made more realistic and useful to clients.
- How can assets be effectively allocated in a low-return environment?
Investors should be ready for these environments by preparing specific policies and guidelines at times when things are still positive. In this way when the bad period arrives, investors will know how to strategically act and more exotic asset classes and countries can be investigated. Safeguarding against these environments beforehand will eliminate panic and ensure that the categories in which assets can be efficiently allocated can be easily found.
- What makes a portfolio efficient?
An efficient portfolio is one that considers the probability, and can efficiently deal with unexpected events. Such a portfolio offers flexibility, can be adjusted quickly and without high costs in order for it to continue to lead to profitable outcomes.
- How can the management selection process be improved?
Before asset managers can be selected, it is important to understand that excellent managers who outperform their benchmarks do exist but just not all the time. This is because top managers take risks by changing allocations and security selections before the herd. Occasional bad periods surface when ineffectual calculated risks were taken and these periods may actually, in the longer run, reflect the strength of the manager.
In the emerging market space, it is imperative to have local asset managers. Active managers in this space are familiar with small and mid-sized gaps, the private equity markets and the corporate bonds that have lower ratings. Regional know-how results in better investments. Not just that, they might actually offer innovative solutions (or relatively unknown ones) that add tremendous value to Western investors who never really looked at them.
- What other advice could you give to investment consultants?
The group as a whole should carefully rethink its business models to reduce its dependency on asset managers. This change will re-enforce independence and place value on knowing exactly what the client wants. Smaller consultants may have to combine their specialisations in certain asset classes and regions to tailor-make solutions. Reinventing the business model takes time but in the long run it will materialise great advantages.
About the Investment Consultants Summit 2012
This unique forum will take place at the Grand Hotel Huis ter Duin Noordwijk aan Zee, The Netherlands, 3 – 4 September 2012. Offering much more than any conference, exhibition or trade show, this exclusive meeting will bring together esteemed industry thought leaders and solution providers to a highly focused and interactive networking event. The Summit includes presentations on optimum institutional portfolio construction, strategic risk management and asset allocation, global economic stability and reducing balance sheet risk.For more information please send an email to [email protected] or visit the event website at www.investmentconsultantseurope.com/ErikVanDijkInterview
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