Investment Philosophy

Consistent Investment Philosophy

An investment philosophy is the overall set of principles or strategies that guides and steers our investment decisions. It helps us to simplify a complex industry, allowing us to concentrate on our relationships with our clients, safe in the knowledge that we are doing our best to protect and grow their assets.

While investment performance hinges on many factors out of our control, most notably the return on markets, we can control other factors. These are the ones we deem the most important in creating and managing a portfolio for our clients. Our philosophy summarises our approach.

We adopt a blended investment approach, with an index based bias.

We believe that cost is important to the performance of a fund and there are only limited situations where we believe there is added value an Active Fund Manager can bring. As a result we believe in using a low cost, typically index based investment which keeps down the total cost of the portfolio for assets where we believe there is limited opportunity to find alpha returns and therefore little value in paying a premium for active fund management. Conversely, for certain assets, we believe there is value in using an active fund manager to create returns which will beat the market return. By using a predominantly low cost index based investment approach we keep the total cost of the portfolio relatively low, even when the small amount of more expensive active management is included.

If active fund managers were able to successfully exploit inefficiencies in the market they would achieve higher returns persistently over time, and not just in the short-term. Yet a study by WM Company, quoted in a 2000 FSA paper, examined the probability of a fund move from one performance quartile to another, for the UK Growth and Income Sector for a period of 20 years (1979 to 1998). The figures show clearly that funds which are initially ranked in quartile 1 show no more than a random chance of being similarly ranked in a subsequent period.

With only one in five fund managers staying in charge of a fund for five years, and a quarter in their first year of managing the fund, it could be that the best fund managers are constantly moving around, and only a few, like Warren Buffet, are staying long enough in a role to count.

Index based investing is a style of investment management where a fund’s performance aims to mirror a market index. Index based management works in conjunction with Modern Portfolio Theory and the Efficient Market Hypothesis, which renders individual stock picking or tactical asset allocation futile. Instead we concentrate on strategic asset allocation to arrive at the right level of risk for clients.  By minimising costs, index based investors hope to generate better returns over the medium to long term.
However, we accept that there are times when an active investment approach is more suitable.  These include:-

  • Sectors where it is difficult to find an appropriate index.  E.g. Property where most indices track property company shares.
  • Sectors which are badly represented by their indices.  An example could be Emerging Markets where the indices are usually dominated by a relatively few countries due to their market cap weighting.
  • Periods where investing in a particular sector needs to be selective.  An example could be Japan where its economic strategy is likely to favour large firms with the majority of their earnings being outside Japan.

We believe in diversification

One of the most important views to arise from modern portfolio theory is that investors should avoid concentrated sources of risk by holding a diversified portfolio.  There are three primary factors which influence portfolio performance; asset allocation, stock selection and market timing.

Diversification of an investment portfolio across a variety of different low correlated asset classes should help to reduce the overall level of risk compared with, say, a portfolio which only includes bonds.  For example, the inclusion of a small investment in a higher risk fund invested in a completely different area, in a portfolio comprising solely of UK bonds, can actually serve to reduce the overall level of risk in the portfolio when viewed as a whole.  This is because the behaviour of the higher risk fund differs to that of UK bonds in how it reacts to varying economic events.  An effective combination of different asset classes can significantly reduce the risk of a portfolio without reducing its potential for growth.

We believe that cost is an important investment criteria

We believe that cost is a critical factor in selecting a product or investment fund. We recognise the need to select companies with sufficient financial strength and adequate levels of service, however cost is one of the few known criteria at outset and it has a demonstrable impact on future investment returns. This informs both our asset allocation strategy and fund selection criteria.

In addition, every time an investment is bought and sold costs are incurred. These include the bid/offer spread, price effects, and stamp duty, and are not included in the Total Expense Ratio (which assumes the funds are to be held and not traded through the period). We aim to keep the Portfolio Turnover Rate, as low as possible using strategic asset allocation, and limiting the movement of funds wherever possible. The cost of a higher portfolio turnover is often hidden, taken out of investment returns.

We believe in strategic asset allocation

One of the most important investment decisions we make for clients is what assets to invest their money in. Depending on their financial goals we will build a corresponding mix of assets that produces the most appropriate level of risk and expected return.

We believe that maintaining a strategic asset allocation is key to successful investment.  Trying to time the market can often result is destroying gains.  After all, timing the market involves getting two decisions right: when to get out and when to get back in.  The chances of getting both right are very slim indeed.

We do not believe in tactical asset allocation

Tactical asset allocation is an active management portfolio strategy that varies the percentage of assets held in various classes and sub-classes to take advantage of short, and intermediate term market inefficiencies. This is in contrast to a strategic approach where an adviser will stick to the client’s initial investment allocation in the long-term, ignoring short-term fluctuations in price, until their financial goals or circumstances change.

Tactical asset allocation attempts to increase returns by overweighting asset classes or sub asset classes that are expected to outperform on a relative basis and underweight those expected to underperform. It goes through and analyses financial and economic ‘signals’ to predict performance and assign relative short-term asset class weightings.

Various studies have shown that tactical asset allocation can reduce returns achieved as easily as it can increase them.  We therefore believe that it is not justified as a core investment strategy.
That said, there may be times where a change in the asset allocation is clearly called for.  At such times we will adjust the asset allocation accordingly.  Whether that is using Tactical Asset Allocation or adjusting the Strategic Asset Allocation is open to debate.

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