How and why do managers select and shape building blocks to meet client objectives?

Our perspective at Encor Wealth Management is that the ability to deploy multi-asset strategies is a critical building block in wealth management businesses today. That is due to the wealth manager’s consideration of an individual’s own situation, their time horizon, objectives and tax set-up, a level above more classical investment managers operating mutual or publically-listed investment vehicles.

Multi-asset strategies match well with an individual’s objectives and time horizons as they are by nature made up of smaller building blocks. These include “asset classes” such as listed (stock market) equities, bonds, cash, real estate, various commodities (for example gold or oil), private equity and also subdivisions of these classes, for example high-growth equities, Emerging Market bonds or stocks in the US or UK markets paying out high income (dividends). These asset class blocks all have varying return and risk (of loss) characteristics and will behave differently in reaction to future events. A client may have requirements for income (cash out on a regular basis) or a specific end time objective portfolio liquidation (selling everything). In both these very common cases, the asset building blocks can be fitted together in a way to make sure that the maximum return is achieved whilst taking the minimum risk (of money being lost).

The skilled multi-asset manager is also able to re-balance, or re-calibrate the client’s portfolio of assets by trimming the size of building blocks that have grown and adding to those that might have shrunk in a systematic and non-emotional, agnostic fashion. And/or by responding to recent past patterns and signals in economies and markets, those building blocks are resized (the base of an algorithmic approach).

Factors in the rise in popularity of wealth management services in the past few years also explain the utility of multi-asset strategies. The usage of what were called defined pension plans by companies and governments has declined in the more mature markets in the West. Employees with those plans did not have to think too hard about financial planning for retirement. Increased autonomy and a world with more (successful) entrepreneurs, and self-employed people has increased the need for those clients to consider the preservation and growth of their acquired assets. Defined pension plans typically run/ran a “balanced” approach between bonds and equities. In the most recent past, the available yields (annual paid interest rates) on bonds have hovered in the very low single-digit range and sometimes dipped below 0%. Entrepreneurs and self-employed people are by nature often more prepared to consider a wider spectrum of investments than the classical conservative “balanced fund” approach. And have done so.

Key to their willingness to consider other asset classes is an understanding of “diversification”. If asset classes have low “correlation” where prices do not move in a similar manner at similar times or perhaps move in opposite directions sometimes, then the portfolio’s risk (of loss) is reduced overall.
In addition and crucially, clients have understood that some asset classes are less liquid (easy to sell) than others: one block being the same size as another but twice as heavy, thus being more difficult to move. But if blocks with different “liquidity” (ease of selling) levels are combined in a portfolio, then exposure to some heavy, dense and potentially high-return assets becomes manageable. Private equity or real estate blocks are not easy to shift in comparison to government bonds or shares on the Prague Stock Exchange, for example. But if considered combinations of these components are held and the portfolio is sufficiently “diversified”, or able to deal with all future “liquidity” events then future total returns are most likely enhanced for the client.
Capturing the widest range of possible ideas by considering any or all asset classes across the globe is at the heart of any successful multi-asset strategy. This certainly applies to EnCor Wealth Management, seated in Prague but considering a spectrum of Czech and international investment opportunities.