How we invest our clients' money (and our own)
Clients often ask us how we invest their money and importantly why we invest that way.
Our low cost investment models are based on our fundamental investment beliefs and principles which you can read about below. We provide eight diversified portfolios to meet our clients' specific goals, objectives and tolerance to market volatility. We rebalance our portfolios quarterly, which means that they are always adjusted back to our clients' risk profile.
For clients that request it, we also provide a range of ethical portfolios based on the MSCI Socially Responsible Investment Indices. We can also provide more bespoke investment solutions where necessary.
We reassess our preferred funds, fund managers, preferred platforms and portfolios annually. As we are independent, we select the most appropriate solutions from the whole of the market without any restrictions. We invest only in equities, bonds and cash and avoid structured products, alternative assets, commodities, hedge funds and private equity. Our portfolios are overseen by our investment committee which includes an independent third party and we also receive regular portfolio construction support and guidance from our main investment partners including Blackrock, Vanguard and Dimensional Fund Advisors.
If you would like to discuss our investment approach further, please get in touch.
Please note, the value of investments may go down as well as up and you may get back less than you invest. Past performance is not a reliable indicator of future performance.
Our principles of investing
Global Capital markets are, on the whole, efficient.
Our core belief is that markets are “efficient”, meaning that prices of stocks, bonds and other assets reflect the knowledge and expectations of all investors.
Though prices are not always correct, the availability of information and its rapid dissemination means that markets are so competitive that it is highly unlikely that any single investor can routinely profit at the expense of all other investors.
Consistent outperformance is rare
It has become more and more difficult to have an edge in the stock market due to improvements in technology, improved research tools and the market’s immediate access to new information. This means it is very difficult for professional active fund managers to outperform consistently and over long periods, and it is even more difficult for us to pick these managers in advance. We struggle to understand whether any outperformance we do see is due to skill or luck.
Risk and return are correlated
Risk or volatility is the price investors pay for the expectation of a greater return and our portfolios will reflect time horizon, client’s risk tolerance, risk capacity but also the returns required to make their plans work. We have a range of portfolios to cover most risk profiles. We do not market time, tactically allocate or opportunistically switch between asset classes.
Investment costs matter
Costs reduce an investor’s net return and represent a hurdle for a fund. Before it can outperform, it must first add enough value to cover its costs. However, most fund managers fail to add value.
The US government agency, the Securities and Exchange Commission (SEC) produced the following chart to demonstrate the impact of investment management fees on the value of investments.
Source: SEC (US Securities and Exchange Commission) Office of Investor Education and Advocacy: How Fees and Expenses Affect Your Investment Portfolio http://www.sec.gov/investor/alerts/ib_fees_expenses.pdf
The chart speaks for itself and offers a compelling foundation for the practice of avoiding expensive management fees when investing.
Global Diversification is essential
We strongly believe in diversification, the principle of spreading your investment risk around. Having a mix of asset classes and geographies means that if one or two are underperforming, they can be offset by the asset classes that are performing well. This provides protection against an overall decline in the value of your portfolio. We do not have a UK home bias in equities as there is no evidence to suggest this increases returns or lowers risk. For bonds however, as we do believe UK gilts represent the risk free asset (if held to maturity) we don’t see the benefit of diversification. Where we do invest in overseas bonds we always ensure the currencies are hedged to sterling.
Investment discipline protects investors
Investing is often likened to a ride on an emotional roller coaster. When an upward trend starts to emerge, investors often follow the trend only once they are convinced that it is for real, which is often at the point that most gains have been realised and the trend reverses. Similarly, following a decline in markets, investors can be compelled to sell for fear of future decline, meaning they lock in losses and miss the opportunity to make them back when markets recover.
Selecting a portfolio that is in line with your long-term tolerance for risk can protect you from the emotional influences and behavioural tendencies that market volatility can engender, and prevent short-term fluctuations from driving your decisions.
Rational investors are risk-averse
Rational investors will seek the highest level of return possible for a given level of risk, expecting higher risks to give access to higher returns. Investment return can be considered a payment to investors for subjecting their assets to uncertainty. Higher exposure to the right risk factors typically leads to higher expected returns but is no guarantee of them. Our objective is to determine which portfolio has the potential to earn the return you require, while still aligning with the level of risk you are comfortable with.
Asset allocation should be at the core of any investment strategy
By asset allocation we mean the proportion of the investment strategy that is allocated to different asset classes available in capital markets, including cash, equity and fixed income, To achieve its objectives, a portfolio must have the right combination of assets in appropriate proportions. We, therefore, consider it should be the first building block in constructing an investment portfolio.