Why have discretionary fund managers (dfm’s) and model portfolios (mps’s)  produced negative returns in 2022?

If you have placed your pensions, savings and investments with a financial adviser there is a strong possibility you are invested in a model portfolio service (MPS) whereby you delegate the execution of an agreed investment strategy to an investment house. 

The 60/40 model portfolio, which consists of 60% equities and 40% bonds, has been a popular and successful investment strategy for well for over 50 years. A combination of growth and income providing a safe way for investors to grow their investments without taking excessive risk.

However, in recent years, experts have questioned whether these models can continue to deliver risk adjusted positive returns moving forward. The criticism centres around a lack of diversification to mitigate risk.

There have only been a handful of occasions in 100 years, generally considered as ‘Blackswan Events,’ (abandonment of the gold standard and World War II) where bond prices haven’t gone up in value when equity prices have fallen. 

Interestingly, the current macro-economic environment is frighteningly similar to stagflation in the 1970’s; where the strategy also proved ineffective! 

The 60/40 model worked well in the past because shares and bonds were negatively correlated delivering a diversification effect. The equity element performing well in good times with safer assets like bonds appreciating in value and providing a yield during bad times.

Keeping interest rates artificially anchored at zero has destroyed that inverse relationship. In recent years equities and bonds have become more positively correlated resulting in both asset classes moving in the same direction more often which has made these portfolios more susceptible to market downturns.

In conclusion, while the 60/40 model portfolio may have been a reliable investment strategy in the past, its relevance in today’s market is being questioned. 

As a result, you may need to explore alternative investment strategies to achieve your investment objectives. An actively managed portfolio which invests in a broader range of asset classes may offer potential benefits and may be worth considering for investors seeking better returns and more effective risk management in a debt ridden, slow growth, inflationary environment. 

If your investments have produced a negative return in 2022 please take the opportunity to book a second opinion consultation.

Discover how we can help you to achieve your investment goals. For a second opinion please visit website, email enquiries@fwm.gi or call us on Tel: +44 207 998 0570

Our financial advisers are fully licensed, qualified and regulated to provide financial advice in Spain and across the EU.

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