Senior Manager, Client Analytics13 years of experience (as of 12/31/16)
New research shows successful client outcomes from portfolios can be enhanced by selecting investments that target real-life objectives, not just try to control for expected market volatility. Sunder Ramkumar, senior vice president of Capital Group’s client analytics team, shares his findings that highlight the investment metrics that matter most to clients when looking at long-term results of their portfolios.
Sunder Ramkumar: Engagements with clients often start the same way, with a focus on portfolio volatility. And, while that’s important, our research shows that portfolios that are also built to meet real-life objectives can demystify portfolio construction and improve client outcomes. I’m Sunder Ramkumar in the client analytics team at Capital Group.
As an industry, we built a bit of a recipe around portfolio construction. Let’s start by measuring how much volatility an investor can handle and match a client’s appetite for volatility with a well-diversified portfolio of stocks and bonds. There’s just one problem. What about client goals? Risk isn’t just volatility but, really, the client who fails to meet their goals. This sounds very simple, but the focus on goals has profound implications, I think, for how we build better portfolios. This really is the subject of our paper: “Which Fund Attributes Matter for Goals-Based Investors?”
I’d perhaps highlight three key findings. First, ingredients matter. While advice is often focused on the right amount of equities to match a client’s risk tolerance, changing the type of equities [and] the type of fixed income can materially change outcomes and create better alignment with client goals.
Second, expand conventional views of risks. While standard deviation is important, advisors can also use downside capture, evaluate the potential for large losses in retirement or use long-horizon risk. What happens over longer holding periods to better align with long time horizons that investors have when building wealth?
Finally, bottom-up flexibility can provide more precision in asset allocation. While traditionally we tend to be prescriptive and rigid, flexibility on size, on style and domicile provide portfolio managers with the tools they need to achieve investment objectives.
To learn more, download the entire research paper.
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