Financial advisors are always looking for ways to add value for our clients. A past offering was that of investment genius. There were investment geniuses all over the world offering their services as a financial advisor. When advising you on how to set up your pension and investments, the investment genius would tell you to invest 3.9% of your portfolio in Japanese equities, 4.7% in commodities, 6.3% in property as well as range of other assets. Everything was to two decimal places to make everything look surgically precise.
Then every year, we would go through the task of rebalancing the portfolio, which often involved buying and selling fractions in different funds to set it back to the original weighting. The life companies loved us!
I think you can see that I (and all the others) aren’t investment geniuses and it was an offering we thought we were giving clients when all it was was creating work for ourselves. There are much better ways to offer value and much more skilled and resourced companies who can do the investment bit, so I outsource the asset allocation to them.
For the last 50 years, MSCI have been creating indexes. They employ over 3,500 staff from all around the world to do so. When the largest index funds in the world look for a index to track they go to companies like MSCI for the information that they need. And you too can avail of their resources and indexes too.
The most common index that we use at Bluewater is the MSCI World Index. This index invests in approximately 1,600 different companies across 23 developed market countries. MSCI decides on the weighting that should be invested in each region and sector based on global market capitalisation. Through their research, they know that having 7.52% in Japanese equities and 3.37% in French equities is the correct weighting to have. But they don’t just pick the 1,600 biggest companies. They have a blend of mega, large, medium and small cap companies. This adds to further diversification in other ways:
This is the information of this portfolio that passive fund managers such as Vanguard and iShares buy and try to replicate.
When you look at what MSCI or FTSE create, I have to ask how a financial advisor could create as diversified or balanced portfolio? (And remember, an index is not trying to beat the market, it is trying to capture the returns of the market, which will produce positive returns over the long term.)
That is why it all seems boring to an investor. Will we put our money into something different to the MSCI World Index? Sure we can, but be advised that there’s a good chance that the MSCI World Index already holds a portion of any suggestion in its portfolio. You also don’t have to maintain it and rebalance it, MSCI do that for you. They change the weightings of sectors and regions based on market capitalisation without you even seeing that. That ensures that favourable stocks are added and less favourable ones are removed.
This is one highly diversified fund. One that is invested in different regions, sectors, company size, style of stock and one that is being kept current all the time. So when clients ask me for something different to invest in, how can you get any different to what you are already invested in? Or as Charlie Munger, Warren Buffett’s long time investment partner said:
Let me know what you think at firstname.lastname@example.org
19 April 2021