INVESTINg

"One glove size doesn't fit all"

Consideration should be applied to an investment approach that attempts to steer investors into a single way of thinking.

 

As a concept, the Core and Satellite approach is a single way of thinking, but the Mondial approach applies levels of flexibility and different ‘glove sizes’ through base currency options, risk appetite options and if all else fails, high risk mandates for decisions made outside of the Mondial "Prudent" approach. The following background considerations and principles are absorbed within our culture  and cover:

 

 

 

 

 

 

 

 

 

 

 

 

 

TIME

 

Time is a huge influence on defining the nature of investment risk. At Mondial we follow the lead of major wealth management institutions in defining an ‘investment period’ as requiring at least three years, and preferably at least five to seven years, therefore:

  • Periods up to 18 months are considered ‘speculation’

  • Periods between 18 months and three years are considered ‘cash management’

  • Periods over three years, but ideally five years plus are known as the ‘investment environment’
     

DIVERSIFICATION

 

Markowitz pointed out that the best investment return will come from the investor who puts 100% of his monies into the asset which increases the most. He also noted the difficulty or predicting which asset that “right one” would be. We follow Markowitz’ logic on diversification, which means avoiding being very right but also avoiding being very wrong. The multi-asset weightings are part of this philosophy.

MULTI-ASSET MANAGER / DFM AND RISK / EXPERIENCE / KNOWLEDGE PROFILING


The history of asset management has evolved over the last two decades which has given it time to mature and improve the skill set. Ultimately, the genre appeals to financial consultants because it allows at least three streams of the consultation process to be merged together:

  • Risk Profiling: Regulators fully expect financial consultants to take some effort in determining each client’s attitude to risk or tolerance to loss positions. Asset managers have built asset solutions around this regulatory requirement. The gradations of risk are not set in stone, and Mondial uses the following calibrations: CAUTIOUS, BALANCED, GROWTH and ALPHA. Multi-asset managers frequently use such titles, or similar titles, to help match the requirement of profiling within their products.
     

  • Strategy Vs Tactics: Financial consultants are equipped for input on strategic (medium term) asset allocations, they are NOT equipped for short-term predictions. In these days of algorithmic immediate trading, the ability of a financial consultant to effect a short-term tactical decision in a timely manner is impossible. The financial consultant CAN provide input on strategic long-term goals, and apply appropriate risk profiling. The multi-asset manager fills the gap for financial consultants in that they claim to be able to provide both a STRATEGIC medium term approach to returns and be able to provide short term TACTICAL allocation changes if major economic or political events change their view.
     

  • Investor Experience/Knowledge: Like the above point on risk profiling, regulators expect financial consultants to determine the experience/knowledge levels of clients in order to provide some visibility to the likelihood of the client’s understanding of underlying assets. Mondial therefore separates INEXPERIENCED, EXPERIENCED and PROFESSIONAL/SOPHISTICATED investors. For the latter, they will be expected to understand any decision recommended to them. Their understanding of multi-asset manager is assumed to be excellent. At the other end of the experience/knowledge spectrum, the multi-asset managers provide a superior level of research and analysis [and therefore comfort to less experienced investors] to the point that their asset allocation decisions [not that of the financial consultant] become the backbone of investment implementation.

 

Much of Mondial’s work is focused on the average member of the public. The bulk of Mondial’s investment advice is bulk standard retail advice. The corporate schemes for which Mondial provides significant expertise, are also similar in that investment advice is aimed at the retail (inexperienced/experienced investors) level. In using the multi-asset manager or DFM  approach, investors should understand that there is an extra layer of cost to the fund fees, because the asset managers are actively working on reviewing and changing asset allocation all the time. Generally, this leaves our approach as follows:
 

  • Inexperienced investors: should be very highly focused on CORE. Core is dominated by multi-asset managers as inexperienced investors do not have the skill set and understanding to make decisions themselves.
     

  • Experienced investors: should concentrate on CORE but can, if they wish, consider more complex risk based on their understanding and experience. These Non-Core decisions are often called “SATELLITE” decisions.
     

  • Sophisticated investors: Mondial is less concerned with sophisticated/professional investors, many of whom will be at least as knowledgeable as our financial consultants. For this investor, we seek to provide as much investment opportunity as possible.
     

 

PRICE

 

The subject of price, or cost to client, has had increasing press coverage especially in periods where low growth and lower market performance expectations mean that price becomes an increasingly important factor on net performance. In 2017, Mondial moved towards a more comprehensively transparent approach to fees and cost to clients which can be explained as follows:

  • Cost to Client/Transparency Cost: What Mondial receives, and how Mondial pays-out to advisers, is variable depending on the provider, source of revenue, and advisor. The important thing for clients is, WHAT DOES IT COST? An umbrella has a fixed cost, what happens to the revenue post sale is rarely investigated. Shoppers are concerned with the quality/brand and price of an umbrella. Our principle deals with focusing on COST TO CLIENT so that the impact on investment performance is assessed.

  • Multi-Asset Manager: Multi-asset managers will have a higher fee structure than an average fund manager, and considerably higher than an electronically traded funds (ETF) trackers. Inexperienced/experienced investors should be aware that Mondial’s core approach recommends this slightly higher charging structure for the reasons explained elsewhere.
     

 

CONTROLLING THE ADVICE PROCESS

 

One of the objectives of the Mondial investment policy is to guide financial consultants on the parameters within which they should advise clients/investors. Many of the Mondial consultants have diverse experience as bankers, asset managers, stockbrokers etc., and will be fairly well informed on markets and events related to the industry. Our water cooler talk often involves debate on which market will go up or down the most. However, if such a liberal environment was transferred to investors, Mondial would end up with a highly variable investment approach. Therefore, a significant component of Mondial’s investment approach and investment policy is focused on providing a consistent process. Ultimately, Mondial is not looking to obstruct investor options and we do not wish to block investors from making the decisions with which they are most comfortable. We simply seek to show that the financial consultant takes the same investment approach to every client.
 

ASSET ALLOCATION
 

Asset Allocation is a critical component of investment performance. It is very much at the centre of the Mondial service and features in all aspects of our overall product:
 

The Plan

  • The final asset allocation or investment decision is made after fact finding is completed (the confidential client profile), and therefore the decisions are taken AFTER an assessment of an investor’s attitude to risk, investor experience level and general investment knowledge.
     

The Implementation

  • The actual execution of investment decisions will depend on the product/platform selected; on whether investment decisions are direct or indirect. Financial consultants are expected to have sound knowledge on how to implement most investment decisions.
     

The Follow-up

  • Markets change, circumstances change. Investor experiences change and that affects investor risk appetites. All of this means that from time to time investors should expect changes to their portfolios and original investment decisions. Monitoring investment performance is like physical fitness. The initial performance is only the start of the journey

 

The Mondial Investment Approach explains how we handle investment matters. What is key is that Mondial consultants are trained to follow the ‘Core and Satellite approach’. The Mondial approach does not allow individual consultants to engage in investment decisions outside of the approach laid down – unless the client/investor dictates a more aggressive or non-core/satellite approach. In this instance, Mondial will seek disclaimers / mandates as appropriate.

THE ASSET MANAGER 


When it comes to the question of performance – have you made money or not? – the key components of our matryoshka doll are the characters who invest the money.  We collectively call them asset managers, however the title has many variations:
 

  • Direct investing: via stockbrokers, real estate agents, banks, art dealers etc...

  • Indirect investments through collective investment vehicles or funds
     

Ultimately, the asset manager scene is huge and varied. There might be very few asset classes [cash, bonds, equities, property commodities and collectibles] but what you can do with each asset, and how you mix them up can be complicated.

CORE AND SATELLITE APPROACH 
 

  • The Core and Satellite investment philosophy is the one presented to clients in face-to-face meetings.

  • The face-to-face approach is modified on a case-by-case basis. Individual attitude to risk or tolerance to loss, base currencies, time horizons, are amongst a host of personal issues which lead to differing personal advice.

  • The Core and Satellite philosophy has served the firm well. Since 2002 core funds have enjoyed the momentum of bull markets over this period of time.

  • The firm promotes the Core and Satellite approach on the basis of investment prudence. The bigger the distance between the eventual investment portfolio and the core and satellite approach, the bigger the risk for clients. 

 

CORE. WHAT IS IT?

  • The fact finding process will have established a base currency and an attitude to risk. The Core element refers to the asset allocation decisions that take the portfolio towards meeting or beating a performance objective

  • The official Investopedia definition of CORE (or core holding) is as follows:

“Core holdings are the central investments – or sometimes the sole part – of a long-term portfolio. It’s essential that the holdings have a history of reliable service and consistent returns. The secondary investments are referred to as satellite, meaning that they focus on areas of the market poised to outperform like growth stocks or specific sectors. A thoughtful core holding provides investors with the flexibility to take risks on investments in other areas of the portfolio. The Core is not supposed to be exciting or spectacular. They should be reliable and relevant to the base currency."

  • As we move towards implementing this investment approach, the nature of Core moves towards:

    • Base currency domestic assets: cash, bonds or equities

    • Base currency ETFs in cash/bonds or equities

    • Base currency multi-asset managed funds: cautious/balanced/growth and alpha
       

  • The term Core is based on the concept that the weight of the investment is focused on the overall portfolio objective. As an example, if the portfolio objective is 3% p.a. over inflation on a rolling three-year period in US dollars, the Core should be heavily weighted to US dollar assets aligned to that target.
     

  • To quote Zig Ziegler “If you don’t have a target, what are you aiming at?” Using the Inexperienced Investor as an example, our investment policy tells us that 100% of the investment should be in Core. The performance may not produce excellent results, but the gap between target and performance is easier to explain and easy to understand. Generally such gaps are covered by patience and time.
     

  • The key point here is that the weight of decisions is in assets which are relevant to the base currency benchmark and it is this decision that reduces risk.
     

  • Mondial leans heavily on the research of Professor Gary Brinson and others. Their research studied US portfolios and pensions over a five-year period. The result was the conclusion that the performance Variability [the difference between Mr Smith and Mr Jones for example] is influenced by asset allocation decisions to a factor of over 94. Market timing and individual stock selection do not have a heavy impact. Another reason for focusing on multi-asset management is simply to continue with an intense focus on the weightings within asset allocation.
     

AGREED RISK PROFILE


A central theme when defining Core. Mondial has evolved its approach around the difference between a strategic and a tactical approach to asset choices, as the Oxford English Dictionary defines?

  • STRATEGIC: The art of planning and directing longer term operations and movements.

  • TACTICAL: Done in immediate support, [the] procedure calculated to gain some end goal.
     

At Mondial we understand these definitions to mean that a strategic asset allocation is one that is set for a longer period of time, while a tactical allocation is used to take advantage of shorter-term opportunity in the financial markets.

The tactical route would normally be taken by some professional and experienced investors or, when unusual circumstances dictate. The bulk of our investors will take the strategic or medium to long-term route. 

STRATEGIC

Conservative

Balanced

Growth

Alpha

TACTICAL

Aggressive

Pre-Retirement

Post-Retirement

Income

CORE AND MULTI-ASSET MANAGER

Having established an investor’s base currency and attitude to risk, the task of the consultant and client is to select the appropriate Core fund. Note: We define Core here as including base currency assets, and in the investment policy (i.e. core and satellite in action) we pay some attention to the base currency assets within CORE.
 

However, it is the multi-asset manager who provides the best Active management for Core. The Brinson studies referred to previously prompted us to outsource the active asset allocation to multi-asset managers, so that the task of selecting the actual balance between assets is taken by professional and full-time asset allocators, and periodically changed by them as they see fit. It is extremely difficult for the average investor to get this asset allocation right and to maintain it. As an example, if you select 60 for equities and the markets go up more than the other assets, you are now overweight in equities. In addition, the opportunity to take advantage of short-term investment opportunities is extremely awkward for clients who have full time jobs outside of the markets!

 SPECIFICALLY, MULTI-ASSET MANAGERS OFFER: 

  • The ability to manage portfolios efficiently using significant skills in mixing tactical short-term decisions with strategic medium/long-term objectives.

  • Considerable support from research departments.

  • The ability to select from any asset class, within the parameters of the fund brief to achieve their goals.

Mondial’s expectations of multi-asset manager funds is NOT based on returns in isolation. It is based on a mix of risk and return performance benchmarks.
 

WHAT ARE SATELLITE INVESTMENT?


Satellite investment can cover any type of asset that the investor and his adviser deems appropriate as complementary to the core funds. They are often described as Non-Core. Examples include:

 

  • EQUITY FUNDS: Country or theme-specific funds in traded or private equity.

  • HEDGE FUNDS: Funds that are market neutral, i.e. can gain in both rising and falling markets.

  • PRIVATE DEBT, HIGH YIELD AND EMERGING MARKET DEBT FUNDS: Funds that seek higher returns with higher risks than in developed markets in debt, credit and related markets.

  • PROPERTY FUNDS: Funds that invest in general or specialised Real property or other property funds.

  • STRUCTURED NOTES: Generally engineered fixed term investments in which positive market movement are captured through futures to pay interest at maturity and/or coupons during the term.

  • GOLD AND OTHER COMMODITY FUNDS: Invest in physical precious metal or commodities, trading or mining.

  • INVESTABLE ASSETS: Funds that invest in various asset classes that have a market such as art and precious stone.
     

MONDIAL INVESTMENT COMMITTEE 

 

  • The investment committee consists [IC] of two Mondial members and contributions from external asset managers.

  • The aim of the investment committee is to provide current market views and opinions on a generic basis.

  • The IC does not seek to provide personal advice and its comments are therefore non-specific.

  • The IC commentary will frequently appear in the Mondial newsletter and is available at any time through our office.

  • The workings of the IC are best illustrated by the IC charter.

  • The IC might make occasional recommendations to the Mondial board, however, decisions on whether such ideas are implemented is at the discretion of Mondial board.
     

INVESTMENT PRODUCT SOLUTIONS


There are lots of solutions to investment challenges, we aim to ‘rip the lid’ off all products, platforms and solutions in one go. We will always have solutions to offer, rather like the many layers of a Russian matryoshka doll. We have green brochures, yellow brochures and blue brochures but if you need a red one, we will source it for you.

 

While it’s essential to understand the detailed terms and conditions of products, we focus on the areas of Product Provider commonality. Think of it as a beginner’s guide to differentiating the quality of one coloured brochure from another.

Essentially, there are many players involved in most Product solutions. We lean on our matryoshka doll structure to reinforce the point that Products are generally structured using many separate dolls, each undertaking specific independent task but working together in order to provide a solution.
 

 

THE FINANCIAL CONSULTANT 


The range and amount of providers dictates what will be presented to the client by our Financial Consultant. 
 

Is a a small range of product providers a good or bad thing? A small range of providers can be considered a ‘bad thing’ in situations where the firm only offers one or two provider solutions. A limited range of providers puts the firm at risk of not being able to regularly provide good advice. However, a small range of providers can be considered a ‘good thing’ where the volume of business being transferred from the firm to the provider is sufficient to encourage a high quality of service from a number of providers. This service quality has a significant impact on financial advisor/client communications.
 

Is a a large range of product providers good or bad thing? Our response falls somewhere between the good and bad as above. Financial consultants will naturally veer towards the providers who provide them with the best service. Working with a limited range of providers does help financial planners because it is easier to keep up with product knowledge, the different corporate technologies and the different asset class options. It is time consuming, expensive and almost impossible to know about every provider and every product.
 

Is there an ideal firm or consultant? The ideal consultant will have a small group of ‘favourite’ providers with whom they know the product range inside out, and who fill the basic requirements of most investment needs. However, they will also require the firm to provide specialist options for highly specialised requirements where specific products provide clear advantages. The world of tax planning, estate planning or mortgages are examples of such specialisation.
 

 

THE PLATFORM PROVIDER  


Also known as the platform, product provider or product. For our purposes, we regard the platform provider as the guys who print the brochures – green, yellow, blue etc. The important points to understand are:
 

  • They create the T&C's of the product / solution

  • Investors typically contract with the provider on the advice of the Financial Consultant

  • The provider could be a standalone platform or an insurance company. They have many legal structures but generally they:​

    • Are usually highly regulated as they receive client cash and facilitate investment purchase

    • Provide valuations, usually online

    • Provide administration

    • Should be highly audited and closely monitored for balance sheet security

  • Collect asset prices
     

THE WRAPPER 


We use the term ‘Wrapper’ to distinguish the legal structure of an investment from the administration issues of running a product. The legal structure issues often assist with planning issues such as:
 

  • Insurance wrappers

  • Trust wrappers

  • Such wrappers can provide benefits such as estate planning and tax planning. If taxes can be avoided or mitigated purely because of the legal structure, then the structural issues are often "worth their weight in gold".
     

In practice, points on product and wrapper are often bundled into one solution, but are also frequently separated and are therefore distinguished separately in our literature.

 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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Office 110, Pinnacle Building, Al Barsha 1, PO Box 50060, Dubai, UAE

Email: clientservices@mondialdubai.com

Tel: +971 4 382 0300

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© 2019 Mondial [Dubai] LLC