REGULARS | INVESTMENT COMMENTARY
The long and the short of it David van Schaardenburg takes a critical look at short-termism, the lower returns being achieved and forecast in low volatility assets, and how advisers can best help clients achieve their investment goals. BY DAVID VAN SCHAARDENBURG
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ike most investment professionals my first discipline each working day is to scan the news on financial issues then check key market and security movements. Daily my colleagues and clients will ask me, “What happened in markets today (or overnight)?” It pays to have a good answer, but I do wonder, “What’s the point?” and “Does it really matter?”. Why? Because the investment industry’s focus on short-term trends and news is in contrast to the investment horizons of the vast bulk of our clients. For example, if you are turning 65 today, you’ll have on average between 22 and 25 years of investing life left. So what happens day to day is unlikely to have a material impact on your investment success over that horizon. With KiwiSaver, the increasing proportion of the advice industry’s clients are below 65 so with investment horizons for most getting longer why not screen out “the white noise” and consider longerterm issues. 32 | ASSET 01 | 2021
Where can short-termism limit the quality of advice? In this time of lower forecast returns from mainstream investment types, especially low volatility assets, I do wonder if some of the aspects of a conventional advice and fund selection process can leave clients worse not better off. A prime example of this is the use of return volatility as the key definition of investment risk. Volatility of returns in both client risk profiling and risk assessment of a financial product is usually expressed in annualised timeframes over the last five years. Fine in theory, but where investments in liquid assets or asset classes which are priced daily inevitably will end up being deemed and labelled more “risky” – including by the processes prescribed by the industry regulator. So instruments like shares that are traded daily are deemed “more risky” than a subordinated loan which typically has stability in its value until a credit event occurs, often leading to a sharp decline in value.
When using volatility measures in a risk profiling process, the greater risk may be that we reduce the potential for clients to achieve their financial goals not improve them as potentially risky assets could be deemed “low risk” by virtue of time gaps in valuation and vice versa. When we add in potentially distortionary labels to client risk profiles or investment funds we may further exacerbate this problem. For example most of my clients prefer being termed “conservative” or “balanced” not “high risk” or “aggressive” without fully understanding the potentially negative investment implications of this. A suboptimal outcome from the above has been the preponderance of KiwiSaver members investing in lower return default, conservative and balanced funds notwithstanding that their investment horizons are over many decades. By using short-term return volatility measures in the client risk profiling process and investment product risk categorisation processes, many investors are shying away from higher return asset classes and a range of potentially high quality investments. For example
