Understanding Risk and Model Portfolios

Matching a Model Portfolio to a Client

The FCA has identified practices amongst Discretionary Fund Managers (DFM’s) that has led them to believe some IFA’s clients are being shoe-horned into investment portfolios and continued suitability is not being confirmed.

As a DFM, built by an IFA for IFA’s, OCM Asset Management focusses on a client centric investment strategy called Outcome Based Investing (OBI).

OBI is different to the conventional DFM, in that we like our partner IFA firms to use cash flow modelling as part of their advisory process to define the client outcome (annualised return required to deliver clients objectives).  We then integrate our own risk profiling questionnaire into the process, not just to quantify risk, but to really understand a client’s attitude and capacity for loss, realised or not.

This gets to the heart of a client’s emotional responses to accurately gauge the level of indicative capital loss they would find unacceptable in any calendar year, noting nothing is guaranteed.  It is then a combination of the required outcome and capacity for loss that gives us a basis on which to manage risk for the client, together with our IFA partners.  This truly connects financial planning with an investment delivery mechanism, being client focussed investment returns.

As a result OCM’s clients are not fixed into one portfolio; they are blended across different models over an economic cycle, depending on our perceptions of forecasted market volatility.  We therefore treat each client individually and manage their portfolios in line with their personal risk tolerance.

Consequently if a client does not want to see losses on an annual basis of more than 10% and we believe that the portfolios are entering a period of low volatility, we will move the client into a more aggressive portfolio.

Conversely if we think that volatility and uncertainty is high, we seek to protect portfolio values, secure profits and move the client into a lower risk portfolio; in addition to reducing equity exposures across portfolios.

OCM has four model portfolios, which deliver different outcomes and are managed on a multi-asset basis.  We blend the asset allocation over an economic cycle and endeavour to be in the right assets at the right time.  The asset allocation on each portfolio will vary between 0% equity up to a maximum of 100% equity, to achieve the portfolio objectives.

As published in Investment Adviser.