The future of portfolio management is active


Global Investment Insights

with Ben Kilmartin, Investment Committee Chair, Drummond Capital Partners


Ben is the Investment Committee Chair at Drummond Capital Partners. Established in 2017, Drummond CP manage active, global multi-asset portfolios for financial intermediaries, high net worth individuals and family office clients.

In his role as Investment Committee Chair, Ben is spending a lot of time focused on determining scenarios resulting from shifts in secular trends. 

“It is essential to ensure that the investment framework provides the tools required to manage new risks as they emerge and take advantage of opportunities that arise. We approach the problem from a total portfolio perspective as underlying risks transcend asset classes. Specifically, we think about equity market risk, yields, inflation expectations, liquidity, currency and complexity”, he explained. 

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It is important to have a dynamic and active approach to managing portfolios.

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Ben continued, “we have been in an environment of declining yields and benign inflation for over a generation. While pundits and commentators cannot agree on the exact cause, I think most would agree that the trend will not continue indefinitely. We cannot predict the future, but we can prepare our clients’ portfolios for various scenarios that may occur. From this perspective, I think it is important to have a dynamic and active approach to managing portfolios.”

This said, Ben is equally excited about potential future opportunities as he is worried about the risks permeating on the horizon, namely:

  • The changing world order and the associated geopolitical risks have the potential to unhinge global markets.

  •  Another thematic is business disruption from innovation which has always existed. But the current wave finds its roots with the advent of the internet in the 1990s. That particular innovation is propagating secondary and tertiary innovations that will create winners and losers for an extended period. The answer is not simply a case of value versus growth. Genuine stock-picking will be just as important as it has been in the last 30 years and ironically comes at a time when institutional investors continue to shift towards passive investment. 

  •  The possibility for a secular shift in rates and inflation expectations could pose significant risks and opportunities for multi-asset portfolios. Active management of portfolios will be essential.

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Genuine stock-picking will be just as important as it has been in the last 30 years and ironically comes at a time when institutional investors continue to shift towards passive investment.

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With this in mind, Ben explained how the team at Drummond CP is thinking about asset allocation going forward and although it is difficult to say with conviction how it will evolve over the medium term (next three years), it will undoubtedly be different.

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I think that emerging markets are generally underrepresented in multi-asset portfolios.

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“We take a dynamic approach to asset allocation built upon our proprietary strategic asset allocation model.  The key objective for us is to build robust frameworks and active portfolios that can withstand different scenarios and respond appropriately to changing secular and cyclical trends. In terms of specifics, I think that emerging markets are generally underrepresented in multi-asset portfolios. Also, the prospect of yields increasing from a low base means we need to think carefully about how defensiveness can be built into portfolios. Finally, there is a range of possible inflation outcomes that could occur in the medium to long-term. We try to think about the types of assets that can protect the portfolio against each of those different scenarios”.

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The prospect of yields increasing from a low base means we need to think carefully about how defensiveness can be built into portfolios.

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Ben highlighted regulation and political posturing, both of which are related, of course, as the major structural factors inhibiting our industry’s ability to achieve desired outcomes for beneficiaries and optimise performance.

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Whilst regulation may have good intentions to improve member outcomes, it is a blunt instrument. The unintended consequences of regulation can often be far worse than the touted benefits. 

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“Whilst regulation may have good intentions to improve member outcomes, it is a blunt instrument. The unintended consequences of regulation can often be far worse than the touted benefits”, Ben remarked. 

“The current Your Future, Your Super reforms do have some measures that make sense, but the attempt to weed out underperforming funds by imposing poorly designed benchmarks is concerning”, according to Ben.

He elaborated further, “there is the possibility that the benchmarks will adversely change the way portfolios are managed and studies have shown the proposed benchmarks may not achieve the stated objective of removing the poorly performing funds. While the industry has abundantly aired these concerns, the government seems intent on pushing the reforms through in their current form. Super has become a victim of its success; it is so large and systemically important that it has become a political football, which may not be in the best interests of members overall.”

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Super has become a victim of its success; it is so large and systemically important that it has become a political football, which may not be in the best interests of members overall.

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Ben left us with some lessons learned early on in his career that has served him well on his journey to the role he finds himself in today.

“My first job out of university was with a major global alcoholic beverage company, and my role was in the marketing department for beer. What initially seemed like the dream job for a graduate, I soon discovered that I was not well suited to the role. At the time, my family was encouraging me to “stick it out”, but I decided to search for a role in a different industry, and I am happy that I did. At the very least, I hope I allowed someone else to do a job they love. Generally, I think it is important to do a job that you enjoy, are good at, and contribute something that the world needs”, Ben explained.

 
 

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