In the portfolio’s simplest form, the gains – and therefore the risks – come from equities, while the containment – the main source of income – is provided by bonds. The proportions are dependant on the taste of the investor and whether they have an appetite for return or security.

But the inventor of the MPT himself, Nobel-prize-winning economist Harry Markowitz,  acknowledged that this was never intended for running an individual’s portfolio, but to be applied to open-ended, undated, mutual funds with daily cashflows seeking to grow in value.

He said: “The investing institution I had most in mind when developing portfolio theory for my dissertation was the open-end investment company or mutual fund.”

If the inventor himself ignored MPT for his own pension, advisers and income seekers would be wise not to ignore him.

In spite of this, virtually all investment theory directed at the UK retail market continues to be some restatement or rehash of MPT based on analysis commissioned by institutional investors for funds, not people. This is frequently then re-badged by the marketing departments of fund management firms to suit their own ends when soliciting new money.

We argue that MPT has become a less appropriate strategy in recent years, but nowhere is this more apparent than when seeking to generate long-term income. The primary objective here is certainty of income, not capital growth. This need is invariably for income that arrives in investors’ bank accounts with the same regularity as their monthly bills. Most income investors are retirees who need to replace a monthly pay cheque.

However, fund managers usually have different objectives. They may have a remit to provide an income – which allows their fund to be marketed to income seekers – but they have less explicit goals that might not benefit the end investor.

The reality is that competition for assets often makes maintaining and growing capital an equally important objective because it improves a manager’s position in fund league tables. And of course, more assets and higher values mean increased ad valorem fees for managers.

There is clearly some dissonance between what income-seekers need and how the industry goes about meeting that need. The main risk to a fund manager is that their returns fall below the benchmark and peer group – the risk to a retiree is that the expected income is not delivered.

Essentially, MPT reduces volatility by combining assets whose values move differently to each other. This approach can work with a long-term, open-ended pension fund or scheme with continuously variable cashflows, but not for an income investor who’s timescale is finite and expenses have a fixed baseline.

The biggest difference between a pension scheme and a typical income investor is that the former has monthly cashflows coming in from both investors and employers. For the income seeker, every penny of income being paid out has to be generated by their pension or income pot, which is often their sole source of investment income.

An investment consultant can afford to get it wrong when advising a DB scheme because there is no harm done to the scheme retirees when the employer is legally obliged to sign blank cheques to meet any shortfall.

This is not so with individual income investors. Not only do they have their regular monthly income switched off, but they must also be cashflow income investors as well – a task hard enough for most advisers, never mind their end clients.

Doug Brodie is CEO of Chancery Lane

This article was written for our sister title Portfolio Adviser

While the Omicron covid variant may have led to more restrictions, Luca Paolini, chief strategist at Pictet, said a strong labour market, pent up demand for services and healthy corporate balance sheets, all mean the economic recovery remains resilient.

“The global economy is on track to grow 4.8% in 2022 with the US experiencing a strong recovery in both manufacturing and services,” he said. “Given our positive outlook for the economy, we are looking for opportunities to raise our weighting to stocks in 2022.”

Mixed fortunes

Pictet currently has a neutral stance within equities, with Paolini expressing concerns regarding liquidity conditions in the US as the Federal Reserve moves to rein in a surge in inflation with tighter monetary policy.

“We expect core inflation to peak in early 2022, which should prompt the Fed to raise interest rates by as early as June 2022,” he said.

While concerned about the US, Paolini added the picture is very different in China with the People’s Bank of China (PBoC) creating liquidity at a quarterly rate of of $232bn (£170bn, €204bn), which he noted is by far the fastest pace among all the major central banks.

“Chinese equities could yet set the pace as they are attractively valued following their losses during 2021,” he said.

Few bright spots

While valuations in China are more favourable than a year ago for both equities and bonds, he added that it is difficult to find good value in any major asset class.

Turning to bonds, at a time when monetary policy is tightening across the developed world in response to surging inflation, Paolini noted that government bonds continue to look very vulnerable and unlikely to deliver positive returns.

“Attractive opportunities are in short supply,” he said. “One of the few bright spots is Chinese government bonds as the PBoC is now easing monetary policy, bucking the trend in the rest of the world.

“Second, inflation remains under control, and we don’t expect it to exceed PBoC’s 3% target thanks to more muted demand than elsewhere and a strong currency. The third buy signal is valuation. China’s government bond yield remains attractive compared to what is on offer elsewhere.”

Benjamin Jones, director of macro research at Invesco, said the multi-asset team has favoured equities over fixed income through 2021. While not expecting a crash in the short-term, after a strong year he is tempering his optimism into the year-end.

“We believe that the long-term outlook is positive, with plenty of room for this market cycle to run, which should provide an uplift for stocks,” said Jones.

Despite reason for optimism in the long-run, he added that there are some evident challenges that could take place in the coming year. The most pressing of these, he said, is that markets have delivered strong returns in 2021 which has resulted in stretched multiples.

“It is understandable that many, including us, are questioning whether there will be a pause as we head into the end of the year,” he said. “Who could blame some investors for profit-taking into year end?”

He added: “We are very aware that margin pressure could create headwinds for stocks and general market confidence. This is a topic we are looking at very carefully.”

Trimmed exposure

For Jones, it is important to assess whether demand strength and revenue growth mean that corporate earnings can increase even as margins compress.

“Thus far, cost-cutting in other areas has meant that margins have expanded this year,” he said. “But that will not continue forever.”

He warned that fourth quarter earnings could be vulnerable to some negative surprises; but added that. looking further ahead, increased corporate and consumer spending should allow for greater productivity and growth, hence the team’s more positive long-term outlook for equities.

“Inflation and policymarkers’ responses are key considerations, as are corporate earnings growth and the direction of markets,” he said. “These should cause little more than wobbles in markets, but they did lead us to trim our equity exposure.”

In the long-term, however, he added that bonds look far more expensive than equities, the return in cash is “derisory” and the team does not expect an imminent recession.

“Therefore, we maintain our preference for equity over fixed income assets,” he said.

Profit taking

Another group cutting back its model portfolio equity exposure is 7IM.

While a new era of consumer and corporate confidence should set the world up for a period of strong economic growth, Salim Jaffar, investment analyst at 7IM, said the firm recently rebalanced holdings across its model portfolios, moving from overweight to neutral in equities.

This, he added, was balanced by an increased weighing to alternatives and cash.

Since moving overweight equities in August last year, Jaffar said equity markets have rallied almost 40%. As such, like Jones at Invesco, he said the 7IM investment management team felt now was the “opportune time” to realise some of those gains.

“Given the rally in equity markets, we have opted to take our profits from our overweight equity position and return to neutral, resulting in slightly higher cash and alternatives allocations,” he said. “We still believe that the world is well placed for strong economic growth. However, economic growth and markets are not exactly one and the same.”

He added: “Markets are pricing in good economic conditions and are looking considerably more expensive than they did back when we went overweight equities.”

For its remaining equity holdings, 7IM is taking more selective exposure rather than an overweight position in the broader equity market, believing a more robust consumer-driven cycle will see different winners emerge.

“Many regions and industries that have struggled to attract investors over the past decade are better positioned to capitalise than the huge US tech giants,” Jaffar said. “Opportunities still exist in the US, but there are better ways to take US exposure than pilling into big tech.”

As higher inflation and a change in direction for interest rates have become more likely, Jaffar explained that 7IM insulated its model portfolio against rate rises, using allocations to alternatives and to non-mainstream bonds rather than conventional fixed income

Investment advisers suggest unit linked insurance plans (Ulips) meet all these objectives.

“For those investors who are looking for assured returns, the Indian market today is well poised to offer investment plans that offer excellent guaranteed returns where one can lock in their money for as long as 45 Years,” said Vivek Jain, head of investments at PolicyBazaar.com.

Many NRIs put their money in instruments in the expectation of good returns, but ignore the protection factor. The recent pandemic-induced uncertainty has led many NRIs to seek protection along with a decent return on their investments.

The search often ended in Ulips as the preferred investment choice, even though they have been in the market for decades.

Unique blend

Ulips are a unique blend of investment and insurance components. The premium paid by the investor is divided into life cover and equity investment. The plans generally carry a minimum of a five-year lock-in period and the policyholder can even switch between the funds during that time.

The mortality charges are returned to the investor upon maturity. Mortality charges are levied by the insurer to cover the risk of death in investment plans. For example, if one invests his/her money for 15-20 years, he/she stands to gain returns as high as 12-15%. He/she can also always avail tax benefits on the plans.

As far as savings are concerned, the preferred option for most households used to be fixed deposits. But falling interest rates have changed this trend. The average returns that FDs offer is a taxable 5%. When adjusted for the present inflation rate of 5.3% in India, the real returns are negative.

Better alternative

“Here is where investors look for better alternatives that guarantee positive returns. Savings cum investment plans offer a guaranteed returns on long term investments. Further, they guarantee a payout in case of the sudden death of the policyholder,” said J Jojo James, chief executive, Fosbury Wealth Managers, and partner of Tamim Chartered Accountants, Dubai.

“This not only secures your present but also your future. These plans can offer a tax-free return of 6-6.5%. The zero risk nature of these plans is their USP. Irrespective of market volatility, they offer the promised return to the policyholder. They also allow your money to be locked in for a period of 30-35 years, which guarantees higher returns,” he said.

Investors who look for less risky and guaranteed returns have the option of a hybrid of Ulip and guaranteed return plans called Capital Guarantee Solutions that offer the best of both.

These instruments provide security to the invested amount in the event of market volatility as the fund managers take advantage from the upside of the market.

Most plans split 40% into guaranteed return plan and 60% into Ulips. The added benefit is that the dependents receive the life cover in the event of the death of the policyholder, which is 10 times the annual premiums paid.

The plans also offer tax benefits on premiums, as well as on the maturity amount.

“These plans are ideal not just for you, but also for your dependents due to the insurance component. If you invest in Child Capital Guarantee Solution, their future is secured even if you are not around. In the event of the policyholder’s death, the life cover helps meet immediate expenses. The unique in-built feature of waiver of premium ensures that the future premiums are waived off. The child gets a regular monthly income and receives fund value upon maturity,” Jain said.

For retirement planning, NRIs have the option of choosing a prudent, risk-free annuity plans that secure their sunset years.

The flip side

The optimum potential of Ulips was less tapped by investors because of some myths spread by interested fund houses after the securities market regulator curbed upfront commissions.

Agents used to pocket up to 40%, with rampant misselling, in the initial years of the launch of many Ulips.

Later, this commission was limited to 6.4%, making it more transparent but less attractive for agents to sell them. Ulip benefits were less understood by investors which led to many investors surrendering their plans before they realised their optimum potential.

“Investors should know the advantages of Ulips such as high returns, systematic investment plans (Sip), top-ups, tax benefits, premium waivers, and the flexibility to switch between an asset mix comprising equity or debt using the same policy,” James said.

“Ulips offer a safe path to wealth creation with the added benefit of life cover, the two main concerns for most individuals. The insurance coverage offers a longer tenure which enhances peace of mind,” he said.

The move will also improve the ability of companies to raise capital across the bloc.

The Commission outlined the four key legislative proposals that have been adopted.

European Single Access Point (ESAP)

The ESAP will offer a single access point for public financial and sustainability-related information about EU companies and investment products.

This will give companies more visibility towards investors, opening up more sources of financing.

This is particularly important for small companies in small capital markets, as they will more easily be on the radar screen of EU, but also international investors.

The ESAP will also contain sustainability-related information published by companies, which will support the objectives of the European Green Deal. As a common data space, the ESAP is a cornerstone of the EU’s Digital Strategy and the Digital Finance Strategy.

Review of the European Long-Term Investment Funds (Eltifs)

The review will increase the attractiveness of Eltifs for investors and their role as a complementary source of financing for EU companies.

It will also make it easier for retail investors to invest in Eltifs, in particular by removing the minimum €10,000 (£8,411, $11,213) investment threshold, while ensuring strong investor protection.

Since Eltifs are designed to channel long-term investments, the EC belieces they are also well placed to help finance the green and digital transitions.

The European Fund and Asset Management Association (Efama) said that “the revised framework has the potential to transform Eltifs into a product of choice for European investors and to become a cornerstone of the Capital Markets Union”.

While it welcomed many elements, including the removal of minimum investment amounts for retail investors and the broader scope of the eligible asset universe, Efama said some parts of the proposal “will require scrutiny” and “further clarity”.

Review of the Alternative Investment Fund Managers Directive (AIFMD)

The EC changes will also enhance the efficiency and integration of the Alternative Investment Funds market.

The proposal harmonises the rules related to funds that give loans to companies. This will facilitate lending to the real economy, while better protecting investors and ensuring financial stability.

The review also clarifies the rules on delegation, which allow fund managers to source expertise from third countries. The review will ensure that there is adequate information and coordination among EU supervisors, better protecting investors and financial stability.

Review of the Markets in Financial Instruments Regulation (MiFIR)

The adjustments to EU trading rules will ensure more transparency on capital markets.

They will introduce a ‘European consolidated tape’, which will give investors access to near real-time trading data for stocks, bonds and derivatives across all trading venues in the EU.

So far, this access has been limited to a handful of professional investors.

The review will also enhance the level playing field between stock exchanges and investment banks. In addition, it will promote the international competitiveness of EU trading venues by removing the open access rule.

International competitiveness

Valdis Dombrovskis, executive vice-president for An Economy that Works for People, said: “Europe needs vibrant and integrated capital markets to boost the real economy and bounce back after the covid-19 crisis.

“[These] proposals take us a significant step closer towards creating the Capital Markets Union. This is important for the growth of the EU economy. We achieve this by improving access to company and trading data, and gearing investments towards our sustainability and digital priorities.

“[This] package has a strong focus on helping small companies in small capital markets, making it easier for SMEs to find and access different sources of funding. It will also enhance the international competitiveness of the EU as a place to trade.”

Mairead McGuinness, commissioner responsible for financial services, financial stability and Capital Markets Union, added: “Capital markets play an essential role, alongside banks, in financing our economy but more progress is needed to move towards the completion of the Capital Markets Union.

“We are today taking action at various levels: making our capital markets more transparent, facilitating access to financial and sustainability-related data, and making investment products such as Eltifs and other alternative investment funds more attractive to investors and fund managers.

“This will better serve the needs of companies seeking finance to grow their business, which is crucial for the recovery and in meeting our green and digital objectives.

“But we are not stopping here; we are also announcing today more ambitious CMU initiatives to come in 2022 on access for companies to public markets, open finance, financial education and insolvency.”