Portfolio construction is a specialised skill and there are too many professionals in the investment industry who manage people’s money without the right knowledge to build portfolios, according to the new chair of the CIMA Society of Australia.
“I took the chair role because there are a lot of people who make decisions about investments that really don’t understand portfolio construction,” CIMA Society Chair Pauline Vamos says in an interview with [i3] Insights.
“If I am an adviser and I’m advising a very large self-managed fund around how they construct their portfolio, then your normal RG 146 is not going to get you there. You need that extra qualification.
“Whether you are a person on an investment committee, whether you are a consultant or a financial adviser who is looking after high net worth clients, portfolio construction is a specialised skill.”
Some of the main areas that are not well understood include risk and volatility and how these two elements cascade through the portfolio.
Vamos is particularly concerned about the understanding of risk in relation to the underlying asset rather than the financial instrument that is being used.
“There are lots of financial instruments around, but what I often see is that there is a lack of understanding of what the underlying asset and what the underlying risk is,” she says.
“A good example is agriculture, where you’ve got all these great new debt instruments, including collateralised loans, and they allow people to invest in an interest over what is really an agricultural product.
“Often when you look at the disclosure, there is nothing mentioned about the climate change risk [to this asset].”
If I’m advising a very large self-managed fund around how they construct their portfolio, then your normal RG 146 is not going to get you there
For example, the global dairy industry has seen a direct correlation between the number of hot, humid days and the production of milk.
“If you have a dairy farm and you’ve got five warm nights in a row, then cows stop producing milk. If they stop producing milk, your revenue goes down. That is a real cost to the business,” Vamos says.
“So assessing portfolio risk is always a dynamic area of knowledge and there needs to be a process of continuous learning.”
The CIMA Society name was introduced at the end of 2017, with the organisation having previously been known as IMCA Australia. The choice of name meant a departure from the previously shared branding with its United States parent organisation, which changed its name to the Investments & Wealth Institute.
“When the US parent decided to change its name to the Wealth Institute, we then had to decide whether we would reflect that as well,” Vamos says.
“The US parent does a couple of certifications and the second certification they do is like a CFP (Certified Financial Planner).
“We are not in that space here and it is well and truly covered, so we don’t need to have a broad name. We decided that we would instead go to the name of CIMA Society.”