The Portfolio Construction Files

Helping clients identify value for money

BlackRock |08-Jun-2018


Markets have been volatile since the start of 2018, bringing greater focus onto the asset mix in client portfolios. Michael Gruener, Head of BlackRock EMEA Retail discusses how you can help clients identify value for money.

How do you define value for money

Value for money is coming under increasing focus, but it means different things to different people.

Regulation and technology are driving the increase in transparency and cost efficiency – but what proportion of investors feel empowered to define and then measure the value for money they have received?

Focus on outcomes

Value for money will always be subjective. A client’s investment needs may be straightforward, nuanced or complex. Beliefs may need to be incorporated. Risks such as currency or volatility may need to be offset. Return expectations may be revised as long-term market conditions shift.

And value for money can only be judged in hindsight. An investor in a low-cost passive fund who has enjoyed the past decade’s beta rally will say they received excellent value for money. But one who paid a bit more for a volatility-constraining strategy over the same period may have received equal value from the peace of mind this approach delivered.

The best route to understanding value for money at outset is to define the desired investment outcome. By identifying clearly what an investor wants over a timeframe, the investment objective can be determined. Once this is established, the next step is finding the blend of investments to meet that objective.

Assessing value for money

We define value for money as meeting the investment objective in the most cost-effective way. An asset manager’s role is to understand the investor’s goals and constraints. Outcomes are the ultimate goal but risk is the overriding consideration. Finding the right investment balance to deliver the investment outcome within the client’s constraints is increasingly about combining different strategies and factors.

It’s about finding the right balance between long-term market exposure, strategic tilts, dynamic allocation and security selection. It may be that an investor can get a more cost-effective allocation to one market or strategy and free up fees for a higher-alpha investment approach where it is really needed. Or it may be that broad-based market exposure is complemented by a risk-mitigating factor.

Clients are now using a wider variety of products that span different investment strategies, return targets, levels of risk and cost expectations. They are also asking with ever more precision how much each additional layer of investment skill should cost. With margin pressures, fee caps and other restrictions on portfolios, this precision will come more to the fore and is where portfolio analytics come in. Through a scientific and technology-driven lens, portfolio managers can use factors to find the best blend of investments and to show risk exposures, correlations and portfolio inefficiencies.

A new breed of alpha

So, how does active management – or alpha – fit into all of this? The growth of indexing and factor-based investing has been a fantastic disruptor to asset management. This era of unprecedented technological advancement and ‘big data’ also brings an opportunity to enhance returns. Those able to effectively harness big data and incorporate technology will be able to successfully use factors, models and artificial intelligence to drive investment decisions, mitigate risk and drive down the cost of investing.

Alpha-seeking strategies can now be deployed with much more precision. The expectations and pricing of these strategies is becoming ever more granular as investors discriminate between different sources of excess return such as smart beta, low-cost alpha or high-conviction alpha.

It boils down to assessing the cost of each additional layer of investment skill above an index tracker. How much more for hedging? How will the cost of reducing volatility or tilting to factors change? What effect will ESG have on overall pricing? What will be the cost of strategic allocation and how valuable is it to have a team making dynamic stock, sector and asset allocations? And from an outcomes lens, how much more is it worth paying for every 1% of alpha delivered?

Few asset managers have the expertise and breadth to answer all of these questions unequivocally but portfolio construction is becoming more of a science. At BlackRock, we have been building for these times. Having the right analytical tools empowers investors and helps them answer questions about their investment objective and how they measure value for money.

The opinions expressed are as of 18 May 2018 and are subject to change at any time due to changes in market or economic conditions. The above descriptions are meant to be illustrative and is not intended to be investment advice or a recommendation to take any particular investment action. There is no guarantee that any forecasts made will come to pass.

Michael Gruener
Managing Director, is Head of BlackRock's Europe, Middle East and Africa Retail business.

Diversification and asset allocation may not fully protect you from market risk.

Risk management cannot fully eliminate the risk of investment loss.

This material is provided for informational purposes only and is not intended to be investment advice or a recommendation to take any particular investment action.

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