Investment Philosophy
OUR RISK FOCUSED APPROACH TO INVESTING
The process of investing is actually one of risk management. A plethora of risks exist from market risks (share, fixed interest, property, currency) to liquidity, complexity, inflation, product, counterparty and manager risks, to name a few.
We define a successful investment experience as one where our clients can sleep soundly at night, have a strong chance of achieving their future lifestyle goals and both understand and believe in the investment journey they are taking.
The development of our investment process has been driven by the overriding desire to treat our customers fairly and to deliver investment advice that is in our clients’ best interests.
The world of investing is one of inherent uncertainty. The central objective when operating under conditions of uncertainty is to reduce it as far as possible and then manage the remaining uncertainty with due care and attention, using the tools that are available to do so.
In an uncertain world, good process should deliver deserved success, but does not and cannot guarantee it. Unfavourable outcomes may still occur. However, the likelihood of success with a good process is higher than that of a bad process, where good outcomes are potentially the result of luck more than anything else.
The firm has adopted an evidenced-based approach to investing that seeks to provide the greatest likelihood of a successful outcome to clients; the evidence provides some very clear guidance as to the investment activities that the firm should be focusing on.
SIX FACTORS VITALLY IMPORTANT FOR ALL INVESTORS
Get the asset mix right
Diversify broadly
Manage financial costs
Manage emotional costs
Rebalance the portfolio
Tax wrapper selection
Portfolio Structure
Strategic asset allocation represents the long-term weightings to different asset classes (e.g. cash, fixed interest, property, shares) in a client’s portfolio. The choice and adherence to a long-term investment policy/asset allocation is the core driver of portfolio risk and thus returns, describing around 100% of the total return of a portfolio and over 90% of the variability of portfolio returns over time. The Sandler Review, commissioned by the UK Government, clearly stated that:
‘For the individual investor, the asset allocation decision is by far the most important factor in determining returns.’
The key to long-term investment success is selecting the right risks to take for the client and how best to combine them in a portfolio to create an enduring, robust and effective investment portfolio.
ACTIVE (Judgemental) or Passive (Systematic)
In the context of the client's best interest rule we are obliged to weigh the evidence as to whether attempts to beat the market (either through timing markets or security/fund selection) provide our clients with the greatest chance of success or whether alternative strategies such as a passive approach – seeking to capture market returns - are in the client's best interests.
If active fund managers appear to be able to beat the markets in a consistent, long-term and ex-ante identifiable manner, then active management (timing market movements and picking shares) should be considered a viable strategy; if not, then a passive approach to investing that seeks to deliver back to investors the rewards for taking specific investment risks should be adopted. We have an open mind and will be guided by the academic research available as to which approach is in our client's best interests. We continuously review the research and will refine our position, where necessary, in the face of new evidence. Our approach is in effect “Evidence Based”.
At present the evidence leads us to believe that a passive (systematic) approach is in our client best interests.
Diversification
Diversification within asset classes by owning a wide basket of holdings that behave like the market (and market risk factors) intuitively makes sense so we use asset class collective investment funds within our client’s portfolios to gain wide diversification.
Diversification away from shares also makes sense to avoid long and short-term share return disappointment.
Manage Costs Effectively
Small differences in returns, due to costs, compound into large differences over extended periods of time, which can materially affect future lifestyle choices. The evidence indicates that investment industry costs are high, particularly those related to active management i.e. managers attempting to outsmart the market. Minimising investment product and transactional costs (buying and selling) is a keen focus of our approach. In our view, the use of low-cost, passive funds that deliver the bulk of the market returns that we seek to gather, are a rational and valuable tool for building robust client portfolios.
Behavioural finance literature tells us that investors suffer a number of psychological biases, driving them to make poor decisions, including ‘buying high’ at the top of the market and ‘selling low’ at the bottom of the market, needlessly destroying wealth. Our disciplined approach to the ongoing management of client portfolios, along with ongoing expectation management and education, helps to reduce the emotional costs of weak and poorly timed emotional decisions.
Rebalancing
The rebalancing of portfolios is undertaken to keep the risk in the portfolio at a level that a client can emotionally tolerate and also to capture the returns from the asset allocation agreed. A disciplined approach to rebalancing is adopted. Client portfolios will normally be rebalanced at the time of the annual Ongoing Planning Meeting or annually during a pre-agreed window.
Tax Wrapper Selection
The portfolio chosen will generate the return but the taxes to be paid are determined by the Tax Wrapper the portfolio sits in. A pension has a different tax regime from an ISA, General Investment Account, Onshore or Offshore Investment Bond. The same portfolio will deliver different net of tax returns if held within different tax wrappers.
As a result we will wish to match the tax wrapper(s) to your current circumstances & long term objectives with the aim of maximising your net of tax returns.
In Conclusion
Our approach to investing is elegantly simple, yet highly effective. We cannot control the returns that the markets deliver, but we can select and manage closely the risks that our clients take in their portfolios. We can help them to obtain the bulk of the returns delivered by the markets, by minimising both financial and emotional costs and helping them to stay the course. Belief, patience and discipline are the key to a successful investment experience.