Market insights and analysis

By Jerry Wagner

I love to meet with clients. Like the bite of a cold wind on a frosty December morning in the Midwest, a meeting with a client can bring an adviser back to the concerns of actual people trying to survive in a real economy.

While I spend a lot of time dealing with real issues in running Flexible Plan Investments (FPI), I also spend a great deal of “ivory tower time” creating and improving the dynamically risk-managed investment strategies and portfolios that we offer to advisers and their clients.

Building a dynamically risk-managed portfolio

Creating a portfolio for a client requires gathering information from them. We do this with our suitability questionnaire. Clients complete this questionnaire, documenting information about their ability to take risk, attitude or sensitivity toward risk, and time horizon, all of which can determine the appropriateness of a given strategy.

I usually recommend a portfolio divided between both “core” (60%–65%) and “explore” (35%–40%) components.

In my view, the core portion represents the “beta” part of the portfolio—the portion that attempts to capture the return characteristics of various asset classes. It is very important that a portfolio seek to capture these returns in order to keep up with the returns of the appropriate strategy benchmark.

Each core portfolio FPI offers is designed to represent one of five risk profiles: Conservative, Moderate, Balanced, Growth, and Aggressive—and each FPI core portfolio employs our brand of dynamic risk management.

With the explore portion of the portfolio, our goal is to provide “alpha”—excess return for the risk taken. We also seek to address specific concerns or extra exposures that the client may be interested in achieving.

While financial advisers and clients can construct core-and-explore portfolios from the many FPI strategies available, we have also created “easy button” investment options that do all of this hard work for you: (1) Our QFC Multi-Strategy Core and Explore turnkey strategies, which give investors a choice of the percentage of their investment to place within the core and explore categories. (2) Our QFC Multi-Strategy Portfolio—offering combined core-and-explore, suitability-based portfolios.

Of course, creating a dynamic, risk-managed strategy for an investor and then presenting it in a way that is easily understood requires time, skill, and some artfulness. Advisers do not take this task lightly. Yet despite all of the time and effort expended, inevitably in the course of the conversation that ensues immediately after the presentation, more times than not, I hear …

“But what if …?”

In this economic environment, that “what if” could be rising inflation, increasing volatility, falling markets, soaring interest rates, or many other concerns. Most clients are very informed about current events, especially the stresses and strains of the economy. They see these play out before them at the grocery store, the gas station, and in their credit card statements and mortgage applications—and this doesn’t even include what they see on the evening and financial news shows. All of these experiences give rise to genuine concerns.

In a previous article (available after login), I answered the question investors often ask when faced with the uncertainty of the present economic and political environment, “When should I invest?” I showed how one FPI investor tool, the Crash Test Report (available to financial professionals only), provides an objective way of finding an answer.

The Crash Test Report is one of two reports available to advisers in our Crash Test Analyzer. Our Crash Test Analyzer is different from other products created to determine possible performance during adverse market periods. Other products use either scenario models to project what a strategy will do in, say, a spike in interest rates, or a brief period of actual market data to project the same thing. Our Crash Test Analyzer uses actual historical market data for the period selected, in addition to both the research report and composite performance for those exact same periods, to report performance during the adverse event.

The previous article used the Crash Test Report to answer the question, “When should I invest?” A second report in the Crash Test Analyzer, the Regime Strategy Ranking Report, is designed to help answer the question, “But what if …?”

Finding answers to the “what ifs”

Our QFC Multi-Strategy Explore portfolios allow advisers and their clients to address some of their “what if” concerns with Low Volatility and Low Correlation portfolios, as well as different risk-managed ways of accessing the equity markets with Special Equity and Equity Trends portfolios.

While the QFC Multi-Strategy Explore offerings target each of these areas generally, they do so with a diversified portfolio of strategies. Since they are diversified into multiple dynamic, risk-managed strategies, this is probably enough for most clients. After all, it is usually better to have a quiver filled with arrows than a single arrow when confronting a perceived danger.

Still, if an investor has a specific concern (“But what if …?”), FPI provides financial advisers a tool to identify which of our scores of dynamic, risk-managed strategies best targets that concern. With the Regime Strategy Ranking Report, advisers can choose the regime stage that represents an investor’s specific concern and receive a report that lists the best FPI strategy to address that concern from the perspective of return, risk, drawdown, or risk-adjusted return based on our research or composite performance reports.

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Wondering “but what if” … rates rise? … bonds drop? … the stock market crashes? … volatility soars? FPI provides financial advisers the tools to quickly find the answer to these questions … but only for investors using our dynamic, risk-managed strategies.