Time for fundamental allocation rethink
Advisers cannot keep doing the things they have always done and expect the same outcomes, a financial services consultant says.
Friday, February 24th 2017, 6:00AM 
9 Comments
by Susan Edmunds
Grant Pearson, of Longitude68, said there had been a fundamental downshift in the world economy, and it was set to shake up traditional investing models.
“Advisers need to fundamentally reassess the whole idea how much they allocate in equities and the subsections of where they do that,” he said.
He said all asset allocation modelling went back 30 to 50 years and was based on long-term norms since World War II.
Since 2007, those norms had all downshifted but advisers and investors were still allocating across sectors as if nothing had changed.
“Fifty per cent of the world’s consumption will come from non-western countries by 2020,” he said. “These so-called ‘emerging’ markets, advisers need to find a way to safely get exposure to them. They are the only part of the world with the growth we grew up expecting as normal.”
Pearson said the global workforce was shrinking, and with it, economic demand and the average returns that could be achieved. "The USA is at just 0.5% growth, four times less than its post-war average...This means lower GDP growth ahead, everywhere long-term. In turn, earnings per share will be driven down as a result. Thus average equity investment returns will also drift lower."
He said advisers would have to rethink the traditional 4% drawdown rule if they wanted to stick with traditional asset allocations.
Those who invested in index funds would need to find sector-specific options, he said. "Otherwise you're only sharing the cost of losing money."
Traditional ways of investing in emerging markets had burnt a lot of fingers, he said, but the industry would need to develop new ways of doing so.
“If I were an adviser I would be revising the drawdown amounts and revising where I allocate money and thinking long and hard about fund managers that look at these sorts of things versus those that don’t.”
Pearson said advisers found the idea confronting. “The industry is very orthodox. If someone pops up and says 40 years of Morningstar data about how you should allocate assets has to change... I haven’t seen the industry change easily.”
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Comments from our readers
In any case even if this were true DMS studies show that higher GDP growth doesn’t mean stronger stock markets.
Some points to note on a few of them;
1. Hi Anthony, yes your firms paper on safe withdrawals (Morningstar) is absolutely invaluable reading for anyone advising retirees. Good data and tangible things advisers can use.
2. Smitty, u r correct. Not advocating active or passive. The obvious is often missed too.
3. Brent. yes partly agree on correlation to price growth in the shorter term. Longer it correlates well- that's the danger. I'm looking across a portfolio to last 20+ years. GDP and Productivity are still deteriorating- strip out China temporarily holding it all up as an average. It will come home to roost. With E.Mkts there are other ways than investing directly into them.
4. Selwyn. This made me smile. Nestle for exampe has been an investor with boots on the ground in India for 100 years.Ill back them over a suit behind a screen in Oz or NY any day!
5. Brent. I appologise for not being clearer. U misconstrued my message. Have a read of the White Paper for some facts that may surprise you. Fake news.. no just hard cold maths and sound reliable data.
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