Secret Principle 1: Focus on structure
A client’s long-term portfolio structure will dominate their investment journey : Building the right portfolio structure for a client is the central focus of our process. Successful investing is about taking on ‘good’ risks that deliver a positive contribution to a client’s portfolio – these are predominantly carefully selected market risks associated with ownership and lending . It avoids taking on ‘bad’ risks, such as illiquidity, manager risks associated with trying to beat the markets, and opaque and complex product structures.
Our role is to fully understand the risks that we are happy for our clients to take and to combine them in a way that delivers them with a strong chance of achieving their investment goals. In brief, we create an equity-oriented mix of assets (developed and emerging market equities, commercial property) that is highly diversified by security, geography and asset class and balance it, where necessary, with a highly defensive mix of high quality bonds (gilts, corporates and index linked gilts) .
A portfolio must be suitable for the client and their circumstances : Considerable effort is focused on ensuring that the portfolio structure is suitable in terms of a client’s willingness, capacity for and need to take on investment risk. The balance between ownership and lending is the most important decision. Our financial planning analysis and use of a robust risk profiling tool provide useful inputs into the broad portfolio structure discussion with our clients.
Secret Principle 2: Manage costs effectively
Costs are insidious: Small differences in returns, due to costs, compound into large differences over extended periods of time, which can materially affect future lifestyle choices. Costs come in two forms – financial and emotional.
From a financial perspective: 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 (index tracker) 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.
From an emotional perspective: The 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.
Secret Principal 3: Manage risk tightly
Our approach to investing positions us as risk managers, rather than performance managers as advisers have traditionally been. Risk management can be divided into three key areas:
Rebalancing: Having set the right long-term portfolio structure, it is important that the portfolio does not begin to stray too far from this mix, which it will do if left unattended over time. The solution is to rebalance the portfolio back to its original mix of risks on a biennial basis. This discipline forces the unemotional sale of assets that have done well and reinvestment in assets that have done less well, which can, but is not guaranteed to, result in a beneficial ‘rebalancing’ return .
Product due diligence: Deep insight into each of the ‘best-in-class’ products that we recommend to clients comes from the detailed and methodical due diligence review that is undertaken before any product is recommended and on an ongoing basis. Product surprises are simply not acceptable to us or our clients.
Ongoing governance: We have a formal Investment Committee that meets regularly to review a broad range of risks and other investment issues that impact on client portfolios and to reaffirm or refine our robust investment process over time. All meetings are recorded in formal minutes.
Investing is about managing risk tightly: eliminating risks we do not wish to take, and managing those that remain with diligence, insight and discipline. If the right risks are taken, the right returns should follow.
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.