Portfolio Review and Health Check-Ups: Similar Check-points

We, financial planners, are like financial doctors for our clients. We will discuss here, the parameters on which financial portfolio review and medical check-ups are similar, how they are different, and some suggested best practices for client hand-holding.

Health check-ups that are routine i.e. not referred to by a doctor for a particular treatment, are like periodic portfolio reviews. The portfolio review is an occasion to sit with the client, discuss the portfolio and if there is any change in the parameters on which the allocation was based. The difference with a medical review is that a health check-up is all about the patient’s body. Either the doctor is inspecting the body or not inspecting it. The investment portfolio of the client is available with the planner and on any significant change in the market impacting the investments, the advisor can review on his/her own and communicate to the client. The advisor can diagnose on his own, based on market events or change in a fund management mandate in which the client has exposure.

There is nothing sacrosanct about the periodicity (monthly/quarterly) of a portfolio review. It is just a matter of discipline and best practice. It gives comfort to the client and opens up the communication channels on the financial goals itself and in case there is any concern that needs to be addressed. On the portfolio components, apart from the overall allocation, event based ad hoc review is more effective as it is topical and immediate. While the financial planner does ad-hoc reviews on an on-going basis, subsequent to the review, the communication to the client should be segregated into whether it requires any portfolio action or it is for awareness only. The reason is, the client may be anxious when s/he sees an event in the media, and it is our duty to tell him/her whether it requires any action. Let’s look at a couple of examples.

Brexit: it made lot of media headlines, and is still making it. However, from an investment perspective, it is relevant, but not as significant as to warrant a shuffle in the portfolio. To look at facts, the size of the UK economy i.e. GDP, at approx USD 2.85 trillion, and taking the global GDP at USD 78 trillion, is only approx 3.6% of the world economy. A part of their international trade is with the European Union, and that’s about it. From 23 June 2016 we are nearing one year and they held another election on 8 June ‘17.  Though Prime Minister May remains in power, she does not have the moral high ground to enforce Brexit. The exit negotiations with Euro zone is yet to begin. The only potential impact on our investment portfolios is that some Indian companies with exports to UK would be marginally impacted, but a view on an equity stock is the culmination of multiple factors, which is left to the fund manager. Hence Brexit update would be an ‘awareness only’ communication.

‘Trump Trade’: Upon the surprise election victory of Donald Trump in November 2016, there was a significant upward movement in global equity markets and upward movement in bond yields i.e. downward movement in bond prices. It was based on market perception of the election campaign of Mr Trump, of his possible actions upon victory, which would be pro-growth. However, at that point of time, markets were yet to check out what Mr Trump would actually do and what would be the actual impact of his actions. Global equity markets moving up is a positive for our equity markets, at least as a feel good factor. However, how much that would benefit Indian companies is something to be debated by experts. From an investor’s perspective, the allocation to equity should not be increased just because the market perceives Mr Trump to work wonders, which, at that point of time, was untested.

Bond Market crash July 2013: In July 2013, the RBI increased yield levels in the market sharply i.e. bond prices came down significantly. Fixed income portfolios were all in red. All investors were unsettled and were seeking guidance on course of action. Now we have the benefit of hindsight, and it is easy to say that the right decision was to stay put. Even at that point of time, if one booked losses and moved to another asset category, there is no chance of recovery from the investment where the loss was incurred. Rather, if one stays put, as and when the RBI reverses the unprecedented measures, there would be recovery in the portfolio.

Rating downgrade in debt fund: all the instances discussed above are that of stay put. Let us look at an event that may be a decision point. The client has investments in a credit-oriented corporate bond portfolio. There is a credit rating downgrade in one of the bonds in the portfolio from say AA to A. The view that is to be taken is, if there is potential for further downgrade, in which case the NAV of the fund will be impacted further. If the answer is yes, there is a case for moving out, subject to tax incidence. If there is comfort even after the downgrade, e.g. IDBI Bank AT1 perpetual bonds that have been downgraded, then there is no compulsion to exit.

As long as a patient’s body parameters are within an acceptable band, the doctor should not prescribe medication or a change in medication. Medical check-ups are mostly as and when i.e. when a person is not keeping well or developing a symptom, s/he would visit the doctor. Same is the case for investments; when there is a sharp movement in portfolio returns or a perceived big event which may have an impact on the portfolio, the client would call up the advisor. It is possible for the financial advisor to be proactive and update clients through broadcast email or other mode of communication even before the query crops up. This would add to the comfort factor of clients that the advisor is on top of his/her portfolio and is monitoring it regularly. This would lead to long term benefits in the relationship.

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