Investment Philosophy
Introduction
There has been much academic research, both by academics and regulators, that support the theory that the asset allocation within a portfolio is the major determinent of the ultimate performance of that portfolio.
The original theory put forward by Markowitz was that portfolios should be diversified and that there was an efficient investment frontier.
Following on from this, “Determinants of Portfolio Performance”, published in the Financial Analysts Journal in 1986 suggested that well over 90% of investment performance is derived from asset allocation decisions, not market timing or stock selection. This research was confirmed by Brinson, Beebower and Singer in 1991, and numerous subsequent academic studies have reached similar conclusions.
The Myners Report of March 2001 into institutional investment in the UK highlighted the importance of asset allocation. Part of the review defined best practice codes for pension fund decision-making, one of which stated: “The attention devoted to asset allocation decisions should fully reflect the contribution they can make to achieving the fund’s investment objective”.
Our Investment Policy
In deciding upon investment strategies and investments to be purchased we use a standard Investment Policy Statement (IPS) that is modified to meet each particular client’s circumstances, time horizon, attitude to risk and any other relevant criteria important to the client.
Our investment philosophy is:
- We do not believe in market timing.
- We follow a buy and hold investment strategy.
- We use low cost collective exchange traded funds and, where required, unit trust, OEICS, investment trusts, to achieve a wide investment spread and diversification.
- We do not invest directly into stocks and shares
- We use asset allocation to determine the spread of investments over asset classes.
We re-balance each client portfolio annually using the agreed parameters in the IPS
As mentioned above, studies have indicated that poor performance tends to persist whereas good performance does not. In addition, studies have shown that up to 90% of fund managers fail to beat the returns obtained on the relevant benchmark that they are measured against.
For these reasons our investment philosophy is to passively track relevant market indices via Exchange Traded Funds. Allied to this we will use collective investments as a “satellite” to the “core” of ETF’s where suitable index funds are not available or additional returns in excess of market returns are warranted by the client’s financial plan.
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Past Performance |
For these reasons our investment philosophy is to passively track relevant market indices via Exchange Traded Funds. Allied to this we will use collective investments as a “satellite” to the “core” of ETF’s where suitable index funds are not available or additional returns in excess of market returns are warranted by the client’s financial plan.
Investment Charges
Studies conducted by the FSA indicate that another important factor in the ultimate performance of an investment portfolio is the level of management and other charges incurred.
We favour index tracking rather than using actively managed funds as the charges incurred are significantly lower. For example, if two identical funds grow at 7% but fund A has total charges of 1.50% whereas Fund B has total charges of 0.75%, Fund B would produce the greater return due to the lower charges.
Total return after deduction of charges on a £250,000 investment.
(assuming 7% growth rate and ignoring taxes)
| Investment Term | Return 1% p.a. charges | Return 2% p.a. charges | Return 3% p.a. charges | Return 4% p.a. charges |
| 5 years | £337,213 | £320,840 | £305,249 | £290,404 |
| 10 years | £454,849 | £411,752 | £372,708 | £337,338 |
| 15 years | £613,523 | £528,426 | £455,075 | £391,858 |
| 20 years | £827,551 | £678,160 | £555,646 | £455,189 |
It is staggering to note that after 20 years the potential difference in fund values between a fund charging 1% and one charging 4% is £372,362!
Reviewing the portfolio and rebalancing
The final element in our philosophy is re-balancing. It is essential to review any investment portfolio and your circumstances on a regular basis. There is no point in carefully structuring a portfolio and then neglecting it. For example it may be appropriate to alter the structure and risk of your investments if your personal circumstances or time horizon changes. Our role is to assist you in making these decisions as part of your annual review process.
As far as the portfolio is concerned, its maintenance is simple and cost effective, by using a tool called rebalancing. This involves reviewing the portfolio after a given period of say a year and monitoring which asset classes have outperformed and which have underperformed. This involves selling part of those asset classes that have out-performed and buying additional units in those asset classes that have underperformed so that the asset allocation agreed at the outset is maintained.
| Original Asset Allocation | Bonds | Equities | Bonds | Equities |
| Start | 50% | 50% | £50000 | £50,000 |
| Value in 1 year | 46.4% | 53.6% | £52,000 | £60,000 |
| Re-balance | +£4,000 | -£4,000 | ||
| Revised | 50% | 50% | £56,000 | £56,000 |
This may seem a strange approach, but it forces the investor to realise profits when an asset has risen, and buy more of an asset when it has fallen – in other words, buy low and sell high. This may be extremely difficult to do in reality as it is going in the opposite direction of the herd. This is why a disciplined approach is required so that the “market babble” is blocked out. It will mean avoiding technology bubbles, latest fads in the weekend press and tips from friends on the golf course! Our role is to provide you with this discipline.
