Focusing on risk, maintaining a long-term perspective and keeping a handle on value are among the most important considerations for advisers, according to a panel of financial experts.
In the investment world – where market conditions can drastically alter at the drop of a hat and sectors fall in and out of favour on a regular basis – there are plenty of factors for advisers to focus on.
Which golden rules should be followed without exception, though? FE Trustnet asked several financial experts the considerations they deem to be most important for advisers and financial professionals.
Focus on risk
A report from Natixis released last week entitled The Portfolio Barometer, which offers insights into UK financial advisers’ model portfolios, says investors should put risk first to improve the durability of their portfolios. 
“Advisers should be fully aware of the risk level in their model portfolios, and consider a number of different measures of risk as standard deviation is not fool proof,” the report states.
“Advisers should be aware that over the past three to five years, market conditions have been benign and have a plan in place for what to do should risk levels spike.”
Neil Jones (pictured), investment manager at Hargreave Hale, manages risk by ensuring portfolios are never overly exposed to one sector or individual investment.
Even when a holding is performing strongly, he will take profits and reduce the exposure back down to a more appropriate level.
“This has the added benefit of raising cash to invest in new ideas – if the holding continues to perform strongly, potentially you may miss out on some upside, but as we will have retained the bulk of exposure and we will still benefit to some extent,” he explained.
“However, current market conditions are a reminder that not everything always goes up, so taking profits when times are good ensures portfolios are more protected during difficult times. This is the benefit of active investment management and retaining a diversified portfolio.”
Maximise diversification
The importance of diversification is no secret, even to the most novice of investors. However, the Natixis report warns that this should stretch beyond asset classes and include manager, risk factor, strategy and geography in order to minimise the amount of correlation in a portfolio.
Darius McDermott, managing director at Chelsea Financial Services, says that diversification is now more crucial than ever, given today’s challenging markets.
“We’ve had a look at some charts provided by JP Morgan and you can actually get, even in your equity allocation, some reasonable correlation diversification on the difference between emerging market equities and the UK,” he pointed out.
“Emerging market equities are obviously a horrible place to be, but at least they are lowly correlated. In these reasonably uncertain times for markets, I think diversification by both geography and asset class is quite important.”
Use alternatives
The portfolio research and consulting group at Natixis also found that alternatives are vital for a durable portfolio. In its survey of 103 model portfolios from 39 firms across the UK in this year’s second quarter, it found the average conservative portfolio consisted of 25 per cent alternative assets, whereas the average aggressive portfolio had just 8 per cent.
Model portfolio allocations in 2nd quarter
Source: Natixis Global Asset Management
“The portfolio research and consulting group has found that many advisers only use alternatives as risk reducers in conservative portfolios, but they can also be excellent sources of uncorrelated return,” the report continued.
“Advisers should consider both alternative beta, such as property, commodities, currencies and alternative alpha, such as long/short or relative value strategies.”
Ben Willis, head of research at Whitechurch Securities, says adding investments such as commercial property and lower-risk absolute return strategies to a portfolio can provide damage limitation when markets are falling sharply.
“The underlying philosophy behind this approach is that when one asset class is performing poorly, then one or more of the other asset classes may counter this by performing well,” he explained.
“Therefore, over time the portfolio has the potential to deliver robust risk-adjusted returns.”
Be consistent
Often a factor that can be overlooked, Natixis says advisers should clearly define their investment process so that clients can easily understand it. It adds that sticking to solid, tried-and-tested plans in case of market risk spikes is also a good idea. 
Meera Hearnden (pictured), senior investment manager at Parmenion, agrees that having a disciplined investment process is important as it provides a base from which to build the investment business as well as to provide credible track records to investors.
“Chopping and changing investment processes as well as the underlying investments can lead to increased costs and higher turnover, which neither advisers nor their clients would welcome,” she said.
“Making enhancements to an existing process, however, is different, and if a change is required to create improvements and cost efficiencies for investors, then these should clearly be considered.”
Don’t just focus on performance
Laith Khalaf, senior analyst at Hargreaves Lansdown, says it is important for investors to focus on how performance has been achieved, rather than how impressive the performance is.
“Is it by luck or skill? If you’re doing fund selection and you’re choosing a manager, what you’re trying to ascertain is whether they’re skilful, so you can’t just look at performance. You do have to dig down underneath and have a look at what’s driving that performance,” he explained.
As such, Khalaf recommends analysing funds, building tools, obtaining portfolio data from fund managers and generally looking beneath the bonnet to find what is driving the fund’s performance.
“Is it their stock selection? Or is it that they just don’t happen to invest in miners and oil for example which, if you look at this year, would have incidentally led to a huge outperformance,” he added.
