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Financial PlanningInvestment

Creating and preserving wealth

Wealth Managers have the task of both creating and preserving the wealth of their private clients. In these current uncertain financial times, accompanied by greater market volatility as experienced since the financial crisis, this task has become increasingly challenging. Add to this the emotional value clients attach to the swings in the market value of their investment portfolios, and it becomes clear that it requires a strong personal relationship with your client and one where you need to manage your client’s expectations.

One needs to adopt a sound philosophy when managing a private client’s wealth. At SPI we follow an Asset Liability Matching approach to structuring and managing our clients’ investment portfolios. This approach allows us to ensure that we preserve the component of a client’s wealth where it is required to meet his/her medium-term liabilities, whilst also ensuring that the component of the client’s wealth, which is meant to meet his/her long-term liabilities, are structured in a way to achieve optimal capital growth (that is, wealth creation). This approach further allows us to properly quantify and personalise our client’s unique risk parameters and, hence, we can manage clients’ expectations without the risk of making emotional investment decisions. Too often clients make the wrong decisions when markets are extremely volatile, and end up selling when they should be buying or buying when they should be selling. We can apply our Asset Liability Matching approach, irrespective of what the current market conditions are, and it is a methodology that remains consistent over time.

In a traditional balanced portfolio, which is managed at portfolio level (that is, sold as a product such as a balanced unit trust fund), the philosophy is to optimise the risk/return profile of the portfolio by way of diversifying risk by spreading the investments between various asset classes. While there is nothing wrong with the theory, the emphasis is on the portfolio and not the client. When the focus is on the portfolio, all you need to know about the client is what their risk appetite is – that is, low, medium or high risk – and then match the client to a product (or portfolio).

At SPI, our focus is on the private client. For every client, we want to create his/her own Managed Account, which will be a bespoke investment portfolio built around the client’s unique financial position. It is the detail in the implementation that differentiates one wealth manager from another. The differentiation starts right at the beginning when information about a client is gathered. We look at both the present and future financial data of a client with the view that not one client has the same asset/liability profile as another. We believe that a proper investment plan can only be constructed once we have determined whether a client’s liabilities are matched with the appropriate assets.

In our asset/liability matching approach, we are more interested in establishing the client’s risk reality as opposed to the client’s risk appetite. The client’s risk reality is his/her capacity for risk, whereas a client’s risk appetite is subjective and based on how the client feels about risk. Only once we have completed the client’s asset/ liability profile, can we assess the risk reality.

Once we have personalised the client’s risk profile and understand how this interacts with the client’s unique asset/liability profile, can we construct a bespoke investment portfolio for the client. Each client will have a combination of the following three strategies, which will ultimately determine the composition of his/her own Managed Account:

· An amount equal to the client’s income need for the first two years will be invested in an interest-bearing and/or a dividend-generating solution. This is to ensure that the client will always be in a position to fund his/her short-term liability need from an asset class that is not affected by volatile market movements. This represents the client’s Cash Management Strategy.

· The client’s Wealth Preservation Strategy represents ad hoc liabilities that need to be funded from the client’s capital from year three to five. The asset classes that the client will have exposure to will be a blend of bonds, property and equity protected structures. The reason for this blend is that the combination of these asset classes compliments each other irrespective of market conditions. The main objective of this component is to de-correlate with adverse market movements.

· The client’s Wealth Creation Strategy represents the long-term liabilities which will only need to be funded from year five and beyond. The focus is on capital growth and beating inflation over time. The asset classes that we will use here will be a blend of equities, equity based hedge funds and offshore asset classes.

This multi-tiered approach to investment construction means that no detail is missed; asset allocation is thus specific to each client and it is rebalanced and monitored on a continuous basis.

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