How to remove nasty surprises from the investment performance conversation

The toughest client conversations an adviser will ever have tend to follow a major market downturn.

Educated investors expect markets to move up and down, but nobody is truly prepared for a bear market that wipes 20-30% or more from their portfolios.

Pressure doesn't come just from poorly performing investment markets – a severe bear market is often accompanied by a broader economic downturn. Many people lose their jobs and their most basic assumptions about the future are tested in unexpected ways.

The emotional impact shouldn't be underestimated: it can make investors act in unexpected ways not revealed in a typical risk profile.

Whether we are implementing risk management for institutional clients with billions of dollars or a young family looking to invest, we believe that both have the same expectation that their funds are protected.

Target risk, as well as returns

The Milliman SmartShield range provides a reliable way for advisers to manage risk while allowing them to stay in control.

SmartShield follows a dynamic, rules-based strategy that applies greater risk protection when markets are weak and less when they are strong. This dampens volatility and minimises the impact of prolonged and severe downturns.

While the level of risk protection works in relation to market volatility, advisers can also choose to switch it completely off as required.

This differs from many other risk management approaches, which rely on judgement calls or “gut feel” about the state of markets.

Clients can take confidence that their portfolios will perform under different scenarios, enjoying a smoother journey towards their personal goals.

This makes them more likely to stay on track during tough times rather than making snap decisions under pressure. In turn, advisers are better placed to exceed their expectations and build a trusted long-term relationship.

Insurance

Explicit risk management is a form of insurance – it may come at a small cost, but it more than pays for itself in times of crisis.

During the GFC, people questioned whether their money was safe in a bank. Some made poor investment decisions and never recovered. During the coronavirus pandemic, their health and freedom has been under attack and the risk of making poor choices is again higher.

Effective risk management is crucial to provide confidence and help sidestep difficult questions that clients never thought they would have to ask. A solid and stable foundation eliminates surprises, so that clients can sleep comfortably even when markets are volatile.

You can find more information about the Milliman SmartShield range at https://advice.milliman.com/en/smartshield.

Disclaimers

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All investment involves risks. Any discussion of risks contained in this document with respect to any type of product or service should not be considered to be a disclosure of all risks or a complete discussion of the risks involved. Investing in foreign securities is subject to greater risks including: currency fluctuation, economic conditions, and different governmental and accounting standards. There are also risks associated with futures contracts. Futures contract positions may not provide an effective hedge because changes in futures contract prices may not track those of the securities they are intended to hedge. Futures create leverage, which can magnify the potential for gain or loss and, therefore, amplify the effects of market, which can significantly impact performance. There are also risks associated with investing in fixed income securities, including interest rate risk, and credit risk.

An investment in an underlying portfolio, whether with or without Milliman Managed Risk Strategy (MMRS) is subject to market and other risks and no guarantee or assurance is given by Milliman AU or any company in the Milliman group that the use of MMRS in connection with an underlying portfolio will not give rise to losses or that the performance of the MMRS in relation to the underlying portfolio will remove volatility completely or to the extent depicted in an illustration or fully replace losses in the underlying portfolio or to the extent depicted. While generally assets used in connection with the MMRS are liquid, this may not be the case in all circumstances. Further, during periods of sustained market growth, the return to clients from the combination of an underlying portfolio and MMRS should be less than if a client had no MMRS.

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Past performance information provided in this document is not indicative of future results and the illustrations are not intended to project or predict future investment returns.

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Any hypothetical, backtested data illustrated herein is for illustrative purposes only, and is not representative of any investment or product. RESULTS BASED ON SIMULATED OR HYPOTHETICAL PERFORMANCE RESULTS HAVE CERTAIN INHERENT LIMITATIONS. UNLIKE THE RESULTS SHOWN IN AN ACTUAL PERFORMANCE RECORD, THESE RESULTS DO NOT REPRESENT ACTUAL TRADING. ALSO, BECAUSE THESE TRADES HAVE NOT ACTUALLY BEEN EXECUTED, THESE RESULTS MAY HAVE UNDER-OR OVER-COMPENSATED FOR THE IMPACT, IF ANY, OF CERTAIN MARKET FACTORS, SUCH AS LACK OF LIQUIDITY. SIMULATED OR HYPOTHETICAL TRADING PROGRAMS IN GENERAL ARE ALSO SUBJECT TO THE FACT THAT THEY ARE DESIGNED WITH THE BENEFIT OF HINDSIGHT. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFITS OR LOSSES SIMILAR TO THESE BEING SHOWN. For any hypothetical simulations illustrated, Milliman AU does not manage, control or influence the investment decisions in the underlying portfolio. The underlying portfolio in hypothetical simulations use historically reported returns of widely known indices. In certain cases where live index history is unavailable, the index methodology provided by the index may be used to extend return history. To the extent the index providers have included fees and expenses in their returns, this information will be reflected in the hypothetical performance.