The value of your investments and the income from them may go down as well as up, and you could get back less than you invested.

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A changing landscape

Building your own model portfolios is hard, especially in today’s investment climate. Almost all major asset classes have had a tough start to the year, leaving many people wondering what they should be doing with their cash.

For over a decade, bonds have provided steady real returns in a low-interest rate environment. But as we enter a period where we expect interest rates to rise significantly, that’s likely to change. Cautious investors will be hit hard. Going back to 2001, an investor could have locked in a 5% yield from investing in a 20-year UK government bond. Today, that 5% yield has halved, to just over 2.4%. As inflation rises, that isn’t going to cut the mustard.

The infamous 60/40 split that many investors have sworn by for years is slowly fading, and strictly abiding by it in the current landscape could see portfolios suffer. At the very least, we expect volatile markets, with more periods of pain than investors have been used to.

And of course any sharp drops could also trigger the Markets in Financial Instruments Directive II’s 10% letter rule, which requires advisers and investment management firms to write to their clients if the value of their portfolio dips beyond 10% in the current reporting period - a huge headache for those running their own models, especially at times of stress!

A genuinely diversified multi-asset model portfolio has a much clearer role to play in the current rapidly changing world, when conventional approaches to investing are more likely to come under scrutiny.

What we’re doing at 7IM

So, what’s our answer to the problem facing 60/40 portfolios? It’s quite simple, really – we’ve stopped building them.

Over the past five years or so, we’ve increased our position in alternatives significantly. We’ve long anticipated a shift in momentum in the bond markets and have been steadily readying ourselves for the next cycle. For a balanced portfolio, we would expect to see an allocation of around 15% in alternatives, delivering in an environment where bonds struggle to do so. We’re not looking for volatile growth with these alternative holdings, but instead the sort of steady defensive properties government bonds used to deliver.

At the same time, we’re also looking for other investments outside of broad global equities – which tend to be dominated by the large US internet businesses that were the winners of the last economic cycle. We look to invest in different regions and sectors of the equity market, in order to give resilience to portfolios. We also look for non-equity sources of growth; in the high yield bond market, and in emerging market bonds.

The investment landscape is evolving, and portfolios need to be able to adapt to a changing marketplace.

Partnering with an agile investment partner, such as 7IM, centralises the investment responsibility in the hands of an experienced manager, leaving you time to concentrate on all of the other moving parts in your relationships with your clients.

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