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What will the portfolio of the future look like?

23 July 2021

Trustnet spoke to three market commentators to understand what portfolios may look like over the next twenty years.

By Rory Palmer,

Reporter, Trustnet

Less reliance on bonds, greater use of exchange-traded funds (ETFs) and the dismantling of environmental, social & governance (ESG) investing are likely to be the significant changes to portfolios of the future, according to market experts.

In the past 20 years, fund innovation and improving market information has allowed for more people to invest their own money through brokers.

Market crashes since the turn of the century have given investors the opportunity to revaluate their own portfolios and as the world enters another recovery period following the Covid-19 pandemic, the chance has arisen again.

It is difficult to know whether traditional strategies will survive another two decades and how ethical investing will evolve from its current form. Below, Trustnet asked market commentators for their views on what the portfolio of the future might look like.

Firstly, the 60/40 portfolio, split between equities and bonds, a long-held investment strategy was thrown into question as low bond yields and paltry expected returns will change the traditional role bonds play in mitigating the risk of stocks. 

Since 1980, a mix of equities and bonds split 60/40 has generated a compound annual growth rate of 10.2% in the US, but some argued that the time has come to find a new way to invest.

David Kelly, chief global strategist at JPMorgan Funds, said: “The standard 60/40 portfolio is not very well suited for today’s financial market environment and investors require a multicoloured pie, that shifts away from bonds and large-cap stocks.”

This may include a much larger portion in passive index-trackers, according to Richard Philbin, chief investment officer at Wellian Investment Solutions, who said there should be a lot more ETFs, providing platforms can accommodate them.

“As more money gets invested in model portfolios on third-party platforms, unless the charging structure can change then we are stuck with unit trusts.”

He also said this is also true of investment trusts, and while some of these strategies are more than 100 years old, “ETFs are relevant for today”.

“I think we are only at ETF 1.0, while ETF 2.0 and beyond will be a move away from passive and smart beta and more towards active management,” Philbin added.

However, this relies on ease of distribution and whether they can be added to model portfolios.

“Hopefully the platforms can be proactive on this, and then watch the explosive growth of the ETF market. Why should a portfolio only be priced once a day? Technology exists and it just doesn’t make sense to me.”

He explained that there will also be a greater split of ESG investing.

Trying to combine three distinct areas into a succinct strategy can be difficult, especially given the increasing number of available funds and contradictory ratings agencies. This has led to increasing accusations of ‘greenwashing’ in the industry

Granularity on E, S and G funds might become the norm, but I really think ‘impact’ will take a greater market share,” he said.

IBOSS investment director, Chris Metcalfe disagreed, however. He said he was cautious of new strategies, like ETFs, that are untested in all market conditions.

The increase in product and fund innovation has accelerated over the last decade, but with it, new challenges for investors have arisen.

He said: “Just as with the future of the 60/40 portfolio, or the place of absolute return funds, the ideal construct will be a subject of endless debate.”

Metcalfe added that while it is hard to predict what their peers are likely to do, an ever-increasing amount of fund flow is coming via “gatekeepers” who run large amounts of multi-asset money on behalf of advisers.

“At IBOSS, we decided to stay relatively plain vanilla, maintaining a blend of active and passive funds. We choose active based on the balance of probability, and if we don’t feel we have conviction in an active manager outperforming the benchmark net of fees, we go passive.”

The absolute return sector was launched to provide a consistent delivery of attractive returns combined with low volatility, but this has not proved to be that straightforward. This example keeps Metcalfe wary of new investment forms.

“Just as with the absolute return sector, where there have been numerous blow-ups, we remain cautious of new investment forms or constructs that have not been thoroughly tested in all market conditions,” he said.

“This means they need to have been around pre-2008, and this necessarily precludes new methods of investing.”

He also stated that there could be a growing divide between individual investors and “behemoth” discretionary fund managers (DFMs).

“They have a high hurdle of compliance to jump before they invest other people’s money and will naturally err on the side of caution and more proven investing methods.”

Andy Merricks, manager of the EF 8am Focussed fund agreed with Metcalfe.

“Lots of people today are in passives because they’re low-cost and viewed as safer somehow, but they will end up losing more money than a well-managed active fund.”

However, he added that everything was dependent on the next market crash, as these have a tendency to shake-up portfolios. The collapse of Neil Woodford’s flagship fund in 2019 is one example.

“The portfolio of the future will reflect what happens in the next crash. Everything will then change again,” said Merricks.

Yet despite the changes, he said markets tend to recycle old ideas. Although the world today looks very different from 20 years, Merricks said there were similarities if you looked back 25 years to the peak of the tech-boom in the 1990s.

“Everyone 25 years would have said the future would be all tech stocks. There was a programme on Channel 4 called Show Me The Money, it was so easy making money on the latest dot.com stock – everyone was doing it.” After the dot.com bubble burst in 2000, Show Me The Money disappeared.

He said that this has been echoed by the likes of the Robinhood investors in today’s market and has characterised a generation of investors that thinks everything goes up forever.

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