Lateral thinking reaps investment rewards

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Laurenz Czempiel of Donner & Reuschel sees the benefits of lateral thinking when seeking the best risk-adjusted returns in a multi-asset portfolio.

In the past, a primary task of private banks was to select funds and direct investments across various assets to protect and grow the wealth of their clients. More recently, however, many private banks have gone a step further and offer multi-asset products themselves, applying their heritage of strict risk management.

Donner & Reuschel Privatbank, formed in Hamburg from the union of two independent wealth managers, is one such firm. Laurenz Czempiel, one of the bank’s executive board members, says the stewards of private client wealth and increasingly institutional money, need to take note of an ‘investment fatigue’ that many clients suffer, especially if they have invested too narrowly and mainly in local equity markets.

Altering exposures

Given that equities markets have delivered losses over five years, Czempiel says clients may question the wisdom of allocating too narrowly. However, in a multi-asset portfolio, a means is needed to alter exposures more rapidly, by investing around the world and in various asset classes: something most people, and even institutional investors, do not do, he says.

Another reason to invest in a more diversified way, he adds, is because “although investors might think stocks are the best asset class to invest, empirical results do not support the outperformance of ­equities investments for the short- and medium-time periods.

In the US, the 1950s and 1960s were years when the equity markets did not perform well, and in the Great Depression it took 25 years to come back from the lows. Or, consider the past 10 years of negative price movements in the European stock markets.

“One can argue that it is possible to outperform an equity index, but in the case of a major stock market crash, it does not help you much to achieve an outperformance, for example of only minus 20% instead of minus 25% of an index. That does not make the client happy.”

Investing into other asset classes is therefore useful, but investors do face new challenges, such as managing the more complex risks of a multi-asset portfolio. Donner & Reuschel helps clients with a thorough risk management, for example, via its ‘Best of’ manager concept, which invests in multiple-asset classes and multi-managers, using a mathematically informed process.

The models incorporate expectations of volatility, rather than of returns, which are harder to forecast, and “take the emotion out of the investment process, to take part in rising markets, and lose the least when markets fall.”

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