For those who invested heavily in equities between 2000 and 2003 and suffered heavy losses, the impact of a poorly diversified portfolio has become obvious. After such an event, the behavioural psychology of investors often stops them from rejoining the stock market, despite the lower price of stocks. It also poses questions for trustees. Should they dispose of shares? Or should they buy more? If the answer is buy more, when and at what level should they do so?
Over the past five years, certain asset classes, including property and commodities, have produced enticing returns. However, without a crystal ball it is impossible to predict the next best- performing asset class because there are many different types and their behaviour changes according to the economic cycle. Many charity asset managers simply try to best-guess when to change strategy.
A more sustainable strategy is the 'multi-asset portfolio'. Used successfully in the US, it has produced double-digit returns for the endowments of Yale, Stanford and Harvard universities over the past decade.
MAPs use a combination of award-winning asset allocation and correlation theories to build a blended portfolio of cash, bonds, property and shares, with up to eight other asset classes (according to risk profile). These can include hedge funds, life settlements and managed futures.
MAPs have the potential to generate positive returns in any market. If shares are falling, the property, bond and hedge components should generate a positive return. In a flat market, re-invested share dividends, rent and interest will buoy up unit prices. When shares are rising, bonds typically fall in value but derivatives can be used to offset this.
Government reports have shown that asset allocation is crucial for more dependable returns and that uptake of a more diversified approach in Britain has been slow but is now growing apace. Further impetus stems from new Financial Services Authority regulations allowing trustees to access funds from a far wider 'investment universe'.
Trustees can use this concept to help reflect their attitudes, objectives, risk profiles and specific socio-ethical and environmental policies. By adopting MAPs, trustees can be confident that they are doing the best for their charities' funds while adhering to robust statements of principles.
- Markas Gilmartin is adviser director at AWD Chase de Vere.