Cerulli Survey Results: New Themes in Advisors? Portfolio Strategies

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The aftereffects of the bear market are far reaching – retail advisors and investors and institutions alike are questioning how to best construct portfolios, particularly with a greater eye towards downside protection. The breadth of the market downturn exposed flaws in the application of Modern Portfolio Theory, as nearly every asset class performed poorly and investors suffered accordingly.

Client risk tolerance retracted. Money has flowed into conservative vehicles, such as fixed income and cash. Likewise, investors are less likely to identify themselves as “aggressive” than at any point in recent memory. 

Advisors are unlikely to dramatically change how they run client portfolios, but new thinking is emerging as to how those portfolios can be more efficiently constructed to better manage risk. These new ideas, such as tactical asset allocation and use of alternatives, had seen some uptake even before the market crisis, particularly within large institutions, but they are receiving increased attention as solutions for risk-averse clients. This article will examine some of the evolutions, using data from a Cerulli Associates survey of Advisor Perspectives readers conducted in June and July of 2010.

Perhaps no other strategy has seen a greater change in perception than tactical asset allocation. Market timing gave tactical asset allocation a bad name, particularly as some of the industry’s largest fund families paid out massive settlements to investors for allowing late trading in their funds. In past years’ Cerulli surveys around portfolio construction, using style boxes has consistently ranked as the most popular portfolio construction method for financial advisors. Surprisingly, better than half of Advisor Perspectives readers reported they always used tactical allocation, the most popular option selected.