An investment portfolio could be constructed to reflect other preferences, such as the appetite to have exposure to certain companies or industries, adopt a specific level of equity or fixed income risk, or attempt to adjust the average fee paid to managers, to name a few. Choices come with consequences and such trade-offs can be at the detriment to long-term investment returns

Recently, one industry study looked specifically at the preferences of younger investors coming to market. The conclusion stated that “The younger generation want things they are passionate about, that they can engage with, that resonate with their particular desires and preferences, whatever those may be. They want things they can be passionate about.”

The study’s data suggested that younger investors have tended to invest in companies they feel strongly about, a standout theme being the electric car industry at present through firms such as Tesla and NIO. One industry expert at investment research company Morningstar went on to say:

“The younger generation will not be happy in a multi-asset balanced 60/40 portfolio, sitting alongside another million other investors that are profiled exactly the same way.”

The challenge is that preferences naturally come with their own trade-offs. This is crucial to remember. To avoid a traditional balanced portfolio and instead own a portfolio of ‘clean energy’ firms, perhaps with electric cars, wind turbines and solar energy as themes, one must accept that they own a highly concentrated portfolio of stocks with low levels of diversification, large sector biases and more than likely, with high management costs. This will probably negatively impact returns in the medium to longer term.

The aim of this article is not to suggest that these preferences are wrong, in fact investors may benefit from an ‘emotional dividend’ to compensate investors and make the trade-offs worthwhile. This emotional dividend, however, is rewarded at the cost of actual investment returns and investors may not realise the magnitude of this cost.

A key pillar of our investment philosophy at Cavendish Medical is to accept that capital markets do a good job of pricing securities and therefore markets are difficult to beat.

The table below demonstrates this belief by comparing a simple two-fund developed equity and bond portfolio against the cohort of managers running ‘balanced’ portfolios. Each of the other managers in the figure will have had their own preferences, which evidently come with consequences.


Figure 1: Multi-asset peer group performance – 10 years to Jul-21 Credit: Morningstar Direct

The trade-offs are well demonstrated in the chart above. In the last ten years, traditional 60/40 portfolio (highlighted in green) which is weight 60 per cent equities and 40 per cent bonds holds up exceptionally well. Only three of the 116 funds in the sample provided a superior return to this ‘balanced’ portfolio, that is without accounting for any funds that may have closed in the last decade.

Investors who wish to express their preferences in portfolios should be aware they are at a high risk of market underperformance. Instead, sticking to sound, well-researched investment principles is key to a successful outcome.