DFS Portfolio Solutions

In stark contrast to traditional investment managers, DFSPS specialises in pro-actively managing portfolios risk by adjusting investment portfolios as market conditions change.

DFSPS is highly differentiated from the usual ‘laissez faire’ approach to investing, which essentially holds the portfolio constant irrespective of changing market conditions. This conventional approach suggests that investors should ‘hang on in there’ (even) when a market crash significantly wipes out their portfolio values and calls on them to ‘hang on’ until their investments recover.

DFSPS rejects this philosophy as we believe that such risks are unnecessary and indeed unacceptable. Investors should not risk suffering further wipe outs as most investors simply cannot tolerate nor afford the long wait until markets recover.

DFSPS have pioneered an entirely different approach. In order to manage portfolios against possibilities of significant downturns, DFSPS constantly measures various components of portfolio risk and relies on its proprietary risk management models to efficiently monitor multiple risk factors.

Pro-actively, DFSPS risk-adjusts portfolios reducing exposure to riskier markets as market risk increases and actively increasing exposure to less risky markets.

Stabilising risk reduces anxiety, with an ever-present focus on protecting portfolios against the risk of wipe outs along the way.

DFS established its business in 2002 and had initially focused on developing a rigorous manager research capability. Upon experiencing the portfolio effects of the GFC and the subsequent adverse impact on clients, DFSPS concluded that traditional manager research and strategic and/or tactical asset allocation models are deficient and are unable to satisfy the investment needs of investors. DFSPS has developed its own dynamic asset allocation process to provide investors with a superior portfolio management solution. With an impressive 5-year track record showing the investment process to be robust during both good times and bad, DFSPS is opening its doors to IFAs and Accounting firms that prefer to treat investors as clients rather than customers.

IFAs & Accounting firms

DFSPS provide IFAs & Accounting firms with sustainable, cost effective and non-conflicted portfolio solutions. A legitimate alternative to the institutional model, we believe that providing a steadier portfolio journey improves portfolio outcomes and gives clients greater peace of mind.

DFSPS employs a rigorous and differentiated investment approach based on Dynamic Risk Management. We aspire to be trusted partners of IFAs and Accountants by elevating and enabling Advisors to manage portfolio risk in a way their clients understand, appreciate and value.

DFSPS has no institutional links and does not suffer any material conflicts of interest. This means that DFSPS is enabled to make clear decisions with no bias or concern for outside influence. Most importantly, it lays down a solid foundation for DFSPS to act entirely in the best interests of its clients.

DFSPS currently manages in excess of $250 million on behalf of its IFA & Accounting clients.

DFSPS Models

As highlighted in the diagram below, DFSPS offers a suite of Asset Class or Sector based Models, which advisors use to customise the asset allocation with their clients. Alternatively, fully implemented portfolios are available through the dynamically managed Risk Profile Models. Advisory firms have the option of maintaining their own branding through a white-label structure and tailor investment solutions by blending their internal capabilities with the DFSPS Models.

DFSPS constructs Asset Class Models for each major asset class (13 in total), the objective of which is to generate returns (net of fees) above each stated benchmark through active management.

The Risk Profile Models (RPMs) provide clients with timely and efficient portfolio outcomes which are achieved by automated rebalancing in line with the dynamic risk based asset allocation process employed. As suggested by the title, RPMs incorporate investment risk. They do so to generate returns above those of risk-free investments, which are generally not expected to provide sufficient returns above inflation over the long term. As investors have a need to increase real wealth, returns in excess of inflation are required. As such, taking on investment risk becomes inevitable.

Given that dynamic market forces can cause portfolio values to vary and fluctuate significantly, the question ultimately turns to…”what is the appropriate level of risk?” The question is confronted by two competing factors, namely: (1) the desire to maximise real wealth (which generally encourages higher risk taking); and (2) the anxiety experienced by investors during periods of market disruption (which encourages less risk taking).

Investors have experienced two periods of significant market disruption in recent times, namely the bursting of the IT bubble (2000-2002) and the GFC (2007-2009). These periods highlighted the risk management deficiency of conventional asset allocation approaches, which saw many portfolios breach their risk tolerance levels.

The Dynamic Risk Managed Portfolios can be accessed at a low cost through the Indexed Models series or alternatively through the Alpha-series which combines both active and passive investments to increase the level of portfolio diversification.

Our Approach

DFSPS takes a proactive approach to managing portfolio risk. Our goal is to better manage portfolio risk and we do this through the following steps:

  • Identify the prevailing conditions and assess market behaviour to discern changing risk conditions
  • Determine the appropriate asset allocation to maintain the risk budget of each portfolio; when the market changes, we adjust the asset allocation to stabilise risk.
  • Monitor equity markets for signs that they have become overvalued, and are at risk of significant losses; reduce exposures accordingly.
  • Within the asset classes, we maintain a core of active managers (which are selected in accordance with our non-conflicted research process), and use passive funds as an overlay to efficiently control market exposures and trading costs.

We think about risks the way investors do and specifically in terms of: (1) the danger that portfolios will fall short of meeting their objectives; and (2) the anxiety investors feel during periods of heightened market turbulence. We also believe that conventional portfolio management exposes investors to unacceptably high risk when markets are disrupted. Our objective is to stabilise portfolio risk and we do this by changing the asset allocation as we observe changes in risk levels. For example, the chart below shows that while the average risk level (standard deviation) of a conventionally managed portfolio has been 6% p.a., it’s been as high as 12% p.a. and as low as 3% p.a. When clients are exposed to higher levels of risk, they feel anxious and some capitulate. In contrast, DFSPS explicitly manages the risk by targeting the same risk level across ALL market conditions. In doing so, the aim is to provide investors with a smoother portfolio journey where their risk tolerances are unlikely to be breached.

DFSPS applies an additional risk management overlay to better manage equity risk, which is the most dominant portfolio risk factor. Typically, equity risk accounts for 50% of the total risk of Conservative Portfolios and up to 90% of the risk of Balanced Portfolios. Where we determine that equity markets are at risk of significant losses, we reduce exposure accordingly. This additional downside risk management strategy is generally employed during periods where the support for equity markets has broken down and valuations are stretched, as highlighted in the Australian Equity CAPE chart below. The exposures are replaced as soon as the potential for significant loss is reduced.

The graph below plots the return achieved by the DFSPS Balanced RPM and Morningstar Balanced Index since January 2012, during which time buoyant market conditions have been generally experienced. The DFSPS investment framework has been built to work during good times as well as the bad and the chart highlights that we have been able to achieve this. Whereas the Morningstar benchmark has benefited from a strong bias to equity risk and bond duration, DFS has managed to out-perform without such permanent biases.

Our Evidence