Evercore Pan Asset

The days of buy and hold are long gone. If you had bought and held UK or US equities over the last decade you would have made next to nothing. You were considerably better off in cash. Government bonds fared a bit better, but there have been long periods in the past when holding government securities was  a  mug’s game, with inflation eating away at their values and markets damaging their prices for long periods.

Some Trustees and investors think making judgements about asset allocation is too difficult. They try to pretend the problem does not exist, or think if they put in place guidelines, ranges and rebalancing they will muddle through. Many of these approaches came unstuck in the very difficult conditions of last year. If you purchased equities every time they fell below your guidelines as their values fell, you just lost more money.

The brutal truth is you cannot avoid making a decision about asset allocation. Every day, whether you are thinking about the portfolio or not, whether you have made a conscious decision or not, your portfolio’s assets stand or fall on the vagaries of volatile markets. That’s why we say let’s see how we can work together to reduce or manage these big risks.

It is difficult. We do not pretend we can make all the calls correctly, any more than anyone else. That’s why we try to make it easier for ourselves and our clients.

Our first advice is to keep it simple. The more complexity you introduce, the more costs you are likely to incur. You can be certain of the costs – they are always with you. You can be less certain that all the cost will generate the extra return you need to win as well as to pay the higher fees.

The second is not to take risks you need not take. A few investment managers do make money over and above the general returns on the type of assets they are buying by superior stock selection. Most don’t. They lose you money, because it is very difficult forecasting which shares and which sectors will do better. So we say index your various equity portfolios, and keep the management and dealing costs low to give you a better return than the average active manager.

The third is to know what you do not know. If something is difficult to understand, if you are not sure of your view, then don’t deal in that market or that asset. We follow over 30 different asset classes and markets, but we do not always have a strong view on each one. When in serious doubt we avoid them. We regard UK investments as very risky at the moment. Of course UK equities will go up if world markets continue to rise, but it seems to us there are less risky ways of buying into world economic recovery.

The fourth is to try to avoid adopting a fashion late in the day when everyone is wearing it. If something looks too good to be true it probably is. If people are having to strain their intelligence to justify unheard of levels for prices or yields maybe it is time to take a profit and be thankful you’ve made some money.

Finally, do not regard cash as an asset you should never hold in serious quantities in an investment portfolio. It should not go down in value, which can be a very reassuring property when the world is out of sorts.

I do not know which horse will win the 3.30 at Newmarket, any more than you do. I am not trying to find the best-performing risky asset for 2009 and put heavy bets on it. I leave that to clever and better-paid investors. What I think charities, pension funds, and many savers need is advice on how to manage risks in volatile conditions, and how to try to earn a decent return. To do that you do need to follow markets, prices and values daily and to have some idea of sensible and feasible rates of return. My colleagues call that “Dynamic asset allocation”. I call it commonsense. In my case it is well tempered by knowing just how cruel and humbling markets can be to those who venture their money or their opinion.