Addressing structural trends within wealth management portfolios

To generate long-term investment returns and help protect client wealth, it is important to consider structural trends.

By identifying and avoiding the risks that emerge from these structural trends, such as climate change, resource transition, and biodiversity loss, wealth managers can help minimise the impact on client portfolios.

To assist wealth managers in addressing structural trends and emerging risks, we have developed a set of principles. These principles can be considered when setting objectives, constructing portfolios, managing risks, and establishing a governance framework. By following these principles, wealth managers can navigate the challenges and opportunities presented by structural trends.

Structural trends and emerging risks investing principles

The longer the time horizon, the more influential structural trends become, making it essential to build portfolios that can withstand different future scenarios. However, structural trends should not be thought of as solely long-term considerations, as they can manifest in shorter-term periods and have a variety of impacts across multiple timeframes. For example, there may be shorter-term climate regulation risks as well as longer-term physical impact risks.

Structural trends tend to be highly dynamic – new opportunity sets often emerge, and early disruptors can be disrupted themselves. Specialist managers are best placed to navigate this dynamic. Furthermore, allocations to thematic exposures in broad-based strategies tend to be smaller, and possibly negligible at the total portfolio level.

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Addressing structural trends within wealth management portfolios

To generate long-term investment returns and help protect client wealth, it is important to consider structural trends.

Structural trends and emerging risks investing principles

1. The importance of time horizon is often underappreciated during objective setting, even though it impacts every aspect of the investment process.

2. Wealth managers should integrate structural trends into their broader client risk management process.

3. Structural trends should be managed at the total portfolio level.

4. Assigning a formal risk budget across a portfolio of long-term thematic investments facilitates a holistic management of the overall exposure.

5. Diversifying exposures across multiple trends will likely deliver more robust outcomes and a lower total portfolio risk contribution.

6. Many structural trends, such as climate and energy transition, are specialist areas requiring specialist asset management.

7. Focus should be on long-term structural trends where they are deemed material and investable.

8. Performance of long-term oriented strategies should only be assessed over long time periods.

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