Managing and Planning through Uncertain Times from an FA Perspective

This article is reprinted from the Indexology blog of S&P Dow Jones Indices.

In March 2021, we facilitated a discussion during S&P DJI’s virtual event with two financial advisors from Australia and Canada and an NZX representative who works closely with FAs in New Zealand. We asked them to reflect on the past year and how they pivoted with the onset of the Covid-19 pandemic.

Andrew Neatt, TD Wealth Private Investment Advice, shared how in the early days of the pandemic in Canada, he increased the quality exposure of his clients. This addition gave clients reassurance that companies of higher quality were more likely to perform relatively better when plunged into the unknown presented by the pandemic. In Andrew’s blog, he examined how the S&P 500® Quality Index and S&P 500 Low Volatility Index performed during bear markets. In fall 2020, Andrew started to take a longer-term view on the growth expected in the economy and added some small-cap exposure, using the S&P SmallCap 600®.

Jermaine Cooper, NZX, described how New Zealand had a delayed response to the virus, due to its late arrival. Kiwi FAs de-risked their clients’ portfolios, then reverted to a more aggressive portfolio when markets roared back to life. Some investors elected to stay in a “risk-off” mode given the ongoing pandemic, despite the low number of fatalities in the country.

In Australia, Andrew Wielandt, DP Wealth Partners, said he reviewed and adjusted his client portfolios, including embracing ETFs to drive diversification. What he found was clients who had agreed to de-risk their portfolios suffered a loss of about 12%, whereas those who kept risk-on suffered decreases of up to 35% when the market bottomed out in March 2020.

Andrew W. also spoke of joining S&P DJI’s study tour to the U.S. and Canada in 2018. During the study tour, he learned that the SPIVA® Australia Scorecard results that showed most active managers underperformed most of the time were not an isolated example; the results were replicated globally.

Andrew compared the study tour to boot camp: “When I came out of it, I was broken. I came back and said to my clients and the team in Toowoomba—we’ve got to change!”

Andrew also referenced professional indemnity insurance and that insurers are taking a more favorable view of businesses that use model portfolios through ETFs.

With optimism that the worst of the pandemic was over in March 2021, our three experts spoke about what’s next. In Canada, Andrew N. described his firm as long-term strategic thinkers who seek to make as few changes as possible to client portfolios. As such, small changes on the margins is their approach, with minimal disruption to their strategy. His view is that a good, long-term strategy will almost always add value over time.

The subject of ESG was also raised with our three guests. Jermaine shared there is a huge demand in New Zealand, and ESG is a constant topic of conversation, with FAs and investors seeking opportunities that address ESG concerns broadly and in-depth.

Andrew N. described the introduction of several stand-alone ESG model portfolios in early 2021. In Canada, ESG conversations are more numerous this year than last.

Similarly, in Australia, younger clients are proactively seeking out ESG options. Andrew W. now includes asking clients about ESG as part of the fact-finding process.

At S&P DJI, we recognize that ESG integration has become increasingly important and now offer a series of ESG indices—including the flagship S&P/ASX 200 ESG Index and the recently launched S&P/NZX Carbon Efficient Indices.

Finally, we asked our guests to share a significant or interesting risk they are discussing with clients. For Jermaine, a key risk is cybersecurity, given the NZX’s experience in 2020. The exchange was attacked for seven days, leading to a trading halt and loss of significant revenue, as well as the cost of hiring experts to fend off the attacks. FAs need to be aware that they too may be subject to these kinds of attacks.

For Aussie Andrew, the risk he is discussing is the same as pre-pandemic. Are client portfolios too concentrated? Clients may have just been given their one “get out of jail free card,” with their portfolios having essentially reset. Now might be a good time to reevaluate their portfolios, otherwise wildly swinging portfolios may continue.

Finally, Canadian Andrew described the largest risk for clients as the fixed income environment over the next 3-5 years. How can an acceptable return be generated from the defensive portions of a portfolio?

Despite the economic, political, or even medical events that may buffet portfolios, there’s almost always a message that FAs can bring to their clients, with indexing front and center.

The posts on this blog are opinions, not advice. Please read our Disclaimers.