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Newsletter  22/11/2015

Managing Risk for Optimum Return

At the heart of our investment approach is our conviction that the investment portfolios we build for our clients should contain what we believe is our best selection of investments to meet investors’ objectives and to stay within their risk tolerance.

In deciding what is best we aim to avoid being influenced by artificial constraints that might restrict us in our choice of either the mix of assets or the investments themselves. However, below are noted some examples of approaches that can restrict an investment manager from selecting investments in the best interests of investors:

Tracking benchmarks or market sectors with prescribed asset allocation percentages

One of the clearest illustrations of the dangers of this approach occurred during the dotcom boom,a bubble that burst  in 2000. As the prices of technology stocks increased dramatically, so did their weighting in the main indices. Therefore, although many investment managers had been wary of the bubble in the technology sector there was considerable pressure on managers benchmarking performance against an index to hold technology stocks.

It is to avoid this type of constraint that our Risk Managed Funds range does not sit in Investment Association (IA) sectors. Although for our individual private client portfolios we are obliged to agree a benchmark for comparison purposes we are careful not to allow this to interfere with our focus on the priority of generating real returns for clients.  

Low cost at all costs approach

Some investors believe that the best approach is simply to purchase passive investments that will track indices. As a result of the removal of investment decision-making, this approach usually incurs low fees. There are circumstances in which a passive investment is an excellent way of getting short term exposure to a market or in some very efficient markets where it is difficult for fund managers to outperform the index.

However, for a portfolio diversified across different asset classes and regions there also many circumstances in which significant value can be added by using active investment managers. It is for this reason that we do not believe that our clients are well served by adopting a rigid approach to always buying passive or always buying active investments. One of the tests we apply to each investment is whether it is likely to deliver value for money for our clients .

Historical asset allocation models 

Often financial advisers develop asset allocation models designed to meet a range of different client needs.  However these models can remain rigid for some time, and we frequently hear of rebalancing back to models put in place well over a year earlier. This focus on an asset mix that may have been appropriate in the past is a dangerous one and ignores the fact that different asset classes will have different valuation characteristics at different stages in the economic cycle.

Our approach is to review our portfolios on a regular basis to identify the optimal asset allocation position  and move to that asset allocation rather than to be constrained to look backward to a mix that may be outdated and overvalued .

Risk bands with upper and lower levels

Over recent years there has been an increased regulatory focus on the appropriate level of investment risk that should be taken in investors’ portfolios and profiling tools have been created to assist financial advisers and their clients in the selection of the appropriate investments.

Unlike most of our competitors offering risk targeted funds, our fund range is managed to sit below investors’ upper risk limits but with no lower limit. In line with our unconstrained philosophy we believe that if it is prudent to reduce investment  risk in our portfolios  we should be free to do so. In particular if a market shows signs of starting to decline we should not be forced to put more risk into the portfolio in order to maintain a risk level that might not be prudent in the conditions.

For all of our clients, whether their investments are held in individual segregated portfolios or through our funds, our investment team  focus on investments that will add real value to the investor’s portfolio over time with the objective of delivering investment returns  that exceed inflation by an appropriate margin to reward clients for the level of investment risk they are prepared to take.

 

John Jackson
Managing Director, Intermediary Business

David Appleton

Newsletter  21/06/2017

A day in the life of...David Appleton

No two days are the same for anyone working at the front line of investment decisions. This article is a brief and personal account of a full and varied day that brings many challenges for Investment Director David Appleton...not least from his daughter, Lily...

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Newsletter  05/05/2017

Happy Birthday ISA!

Individual Savings Accounts (ISAs) celebrate their 30th Birthday in the tax year 2017-18 with a major increase in the allowance to £20,000 per annum.

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