Academic research has confirmed what many professional advisers have known for years - the most significant factor in determining returns is asset allocation.
Deciding how much to invest in equities, bonds, cash and property - and in which countries - will do more to make or lose investors money than anything else. In fact, the overall asset mix determines around 90% of the variation in fund returns.
ETFs can help solve this problem by allowing advisers and their clients to track world markets accurately, at low cost - capturing global beta with greater efficiency than most active funds. By investing in a portfolio that aims to closely replicate the performance of world stock markets, clients can achieve strategic asset allocation through a broadly diversified investment that is not dependent on manager skill, and is highly cost-effective.
Many advisers now prefer to use ETFs to take care of the big picture, allowing them to devote more of their time to areas where they can add value - typically, by recommending specialist, high-alpha funds where they possess a greater degree of confidence in a particular manager's expertise.
|ETFs - an effective, low-cost solution
• Asset allocation drives portfolio performance - not stockpicking
• Opportunities exist around the world - clients need exposure to global markets (beta)
• ETFs track world indices accurately, with lower charges than traditional managed funds
However, there are disadvantages to a purely passive approach. Firstly, it leaves the client wholly exposed to market movements; secondly, the ‘one size fits all' approach makes no allowance for a client's appetite for risk.
Investing in tracker funds has been likened to driving a car with no brakes. This isn't a problem when going uphill (i.e. markets are rising) but when markets turn, the investor can do nothing to halt the decline - they are effectively on a rollercoaster with no choice about the direction they must take.
A better solution
Barclays Wealth Global Markets aims to address these issues. This newly launched range of ETF-based Portfolios offers cost-effective diversification across all major asset types and geographies, providing a compelling alternative to traditional managed equity funds.
One of the key advantages is the addition of an active asset allocation overlay by the experts at Barclays Wealth Investments. Asset allocation needs regular revisiting - it's not simply a one-off decision. These new Portfolios are far from being ‘dumb trackers' - the managers can adjust the portfolios in light of changing conditions. With this active overlay, the managers aim to protect the Portfolio more effectively. For example, if there are strong indications that UK equities are likely to fall in value, the managers can reduce exposure. This gives investors a degree of reassurance they won't get from pure tracker funds.
Five Portfolios are available, making it easier to match a client's strategic asset allocation needs with their tolerance of risk and investment time horizon. The expected annualised volatility of the Portfolios ranges from 1-5% to 11-15% depending on the weighting to equities, allowing each Portfolio to be mapped into an adviser's existing risk profiling system. The Portfolios can also be blended with each other, offering an increased range of options.
Given the demand from today's investors for comprehensive multi-asset solutions, it is worth noting that these Portfolios provide true diversification, not just across world markets but also across different asset types. As well as shares, bonds, cash and property, each Portfolio also includes commodities and alternative trading strategies. Within each asset type, the Portfolios are further diversified - bond holdings, for example, cover short-term, high yield and emerging markets bonds as well as investment grade and global government bonds.
These Portfolios may prove especially attractive to UK investors, who are often very over-exposed to their home market. Even choosing a global growth fund to complement a portfolio of UK funds may not provide adequate diversification, as many of these funds invest heavily in the UK. By contrast, these Portfolios allocate investments according to the size of the global economies, offering a proportionate exposure to international markets.
Combining the efficiency of passive investing with the reassurance of active management, Barclays Wealth Global Markets offer a new solution for advisers and their clients looking for effective strategic asset allocation, at low cost.
Barclays Wealth Global Markets is available on FundsNetwork, CoFunds and other key platforms. For more information, call 0800 015 1093* or visit barclayswealthinvestments.com
This communication is directed only at persons having professional experience relating to investments. The investment activity described here is available only to, and will only be engaged in with, investment professionals. Persons who do not have experience relating to investments should not rely on this communication.
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