April 15, 2021
Financial advisors have an incredibly tough job to do. They need to excel at gathering assets and managing client relationships to grow their business while competing with other advisors, CFAs and Portfolio Managers who focus on model assets. It's a tough gig.
Advisors are fatigued, trying to navigate today's markets' complexities and pressures, and find more time to bring on new clients. Innovation and deregulation have shifted in democratizing access to investment solutions once reserved for accredited high net worth investors and institutions. The learning curve is steep.
"If you have a structured process around portfolio construction, that frees up time for you to devote to clients and other projects," explains Robert Wilson, Head of Picton Mahoney Asset Management’s Portfolio Construction Consultation Service (PCCS).
On average, advisors spend up to 800 hours (20 full-time weeks) per year on investment due diligence and portfolio construction.
"It’s possible that by implementing a disciplined and repeatable portfolio construction and risk management process an advisor could achieve hundreds of hours of time-savings. That's very meaningful," says Wilson. "I believe over the next three to five years, that in the same fashion that advisors rely on accountants, lawyers and other financial experts, they will look for additional resources to support their portfolio construction and risk management."
Robert Wilson joined Picton Mahoney Asset Management in 2019 after working in numerous professional advisor-facing roles. Picton Mahoney is a leader in Canada in the alternative investment industry and is one of the longest-tenured, largest alternative asset managers.
"There has been tremendous democratization in terms of access to alternatives for investors with the rise of liquid alternative strategies. All of a sudden, these strategies, which traditionally were only available to institutions and high net worth investors, are now available to everyday Canadians," explains Wilson. "It's our goal to help people incorporate these kinds of strategies into portfolios in the most efficient, effective way possible so that they get their desired outcome."
In 2019, a group of six investment professionals at Picton Mahoney had been working on a two-year project to codify the firm's beliefs around portfolio construction and risk management. They saw how beneficial and timely quantitative risk and portfolio construction insights could be to portfolio construction. The group published a white paper that guides Picton Mahoney's line up of alternative investment solutions from that research.
What is PCCS? How does it work?
Through its PCCS, Picton Mahoney will offer advisors access to data analyses and stress testing to help them design portfolios with the potential to perform well across a broad range of economic and market scenarios. The analytics and insights focus on four critical areas: strategic and tactical asset allocation, risk factor analysis and evaluation of alpha sources.
The teams involved with PCCS include experienced investment professionals with backgrounds in asset allocation, risk management, quantitative research, and portfolio management.
There are four main areas that PCCS can help advisors with:
1. Strategic Asset Allocation
This analysis reviews the asset allocation of the portfolio, with a view to identifying the underlying risk factors in the portfolio across a broad range of potential scenarios.
2. Tactical Asset Allocation
It is important to take risk in portfolios. The risks, however, must be intentional and scaled appropriately.
To better understand what the sources of risk can be in a portfolio, Picton Mahoney layers in additional risk lenses upon traditional risk tools such as standard deviation and historical drawdown.
Stress tests and scenario analyses are also available to help advisors understand how their portfolios might perform across a broad range of potential economic and market scenarios. These steps will help inform advisors' tactical asset allocation decisions, and help to make sure that the risk they are taking is intentional and scaled appropriately.
3. Risk Factor Analysis
Picton Mahoney has honed its capability around risk factor analysis, as well as style factors. The analysis focuses on how the persistent drivers of returns, both across asset classes, and within asset classes, potentially behave when combined and how they might complement one another.
4. Quantitative Capabilities
This analysis helps advisors evaluate potential alpha sources using quantitative methods.
By bringing together these four capabilities, a consistent, dependable and repeatable portfolio construction process is available to advisors.
“Advisors having an understanding of the risk in portfolios and communicating that clearly and effectively in a way their client understands, helps the client understand the work that they're putting into in terms of managing downside, and the benefit of working with them to ensure that their client’s goals can be achieved with greater certainty,” says Wilson.