Investment Monitoring

 

How we select and monitor funds for our clients

Stock markets are constantly moving up and down and certain funds perform better than others. There are literally thousands to choose from, so how do we select funds and adapt portfolios to suit our clients' needs and changing market conditions?

The way we decide: which kind of asset classes; which kind of funds; which specific funds and in what ratio to recommend to our clients for particular risk profiles, is changing.

We are making these changes because we are developing our research process to be more robust with a measurable, repeatable, process for quantitate and qualitative analysis.

We are embracing the wisdom from Behavioural Finance, which explains how people react to markets dropping and rising. By combining this knowledge with Modern Portfolio theory we are designing model portfolios which aim to reduce the overall volatility while providing our clients with returns that match their expectations. The system we now use to assess fund and construct portfolios is known as FundSight.

We are also modifying the way we assess and discuss attitude to investment risk with our clients. We now use a psychometric profiling system to ensure that we understand you better.

The last thing we want is for clients to be invested in a portfolio that drops and they panic cashing in at the worst time. Yet we also don't want clients to be invested too cautiously so that they miss out on potential growth

What does this mean for you?
What all this means in practice to your investments will depend very much on your circumstances, how close your existing portfolio is to the mix we would be recommending for new portfolios (for your attitude to risk), how easy or complicated it may be to adapt your portfolio (for example sometimes there are tax consequences for re re-registering investments), how much you have available to spread your investments to diversify and if your investments needs have changed since you last received advice.

For those who are interested in what we are doing for you, there's a further explanation of each of the terms and rational for the new processes.

Tony Davies
*NB: This investment monitoring service is only available for client's funds where we act as their agent. If you hold funds, not under our agency (perhaps bought via a bank) and would now like to benefit from our ongoing monitoring, please get in touch to discuss the alternative options.

 

Other research we conduct

We use specialist software to compare the charges and features of the vast range of all financial products including Mortgages, Pensions, Life Policies, Critical Illness and Income Protection Products. We compare the rates for all kind of Annuities including and Term Assurance. We can also check interest rates for Cash savings accounts to make sure that we get the best deals for you. We couple this technical analysis with attendance of provider seminars, technical workshops and general research, and combine all this with our knowledge and experience to create appropriate solutions and reviews for our clients.

Whilst we are held responsible for our own compliance with regard to all the rules and regulations of the Financial Conduct Authority and legislation generally, we also employ the services of an independent external compliance company. This is to make completely sure we are fully up to date with any changes within the regulations and that we secure independent validation of our compliance procedures, documentation and training. We feel this also gives our clients an extra level of reassurance.

 

Modern Portfolio theory and our quarterly decision making process on asset allocation:

Economists know that by diversifying a portfolio - especially with assets which have opposite correlations - you reduce the volatility or risk and increase overall return. In very simple terms if an ice-cream van also sold umbrellas when sales of one are down they will be up for the other and produce a steadier return. By spreading your portfolios over different asset classes we reduce the overall volatility. We work with 11 asset classes the main being cash, fixed interest, equities, absolute return, commodities, commercial property and some are sub divided further.

We involve an independent economist in our quarterly meetings where we set our optimum asset class mix for the various risk profiles and investment objectives. So for attitude to risk level 2 - aiming for growth we will decide what overall mix of assets is suitable for the longer term given our current view regards economies and markets across the world.

We also allow a short term weighting to take account of short term opportunities. For example we might think there are some pockets of opportunity in commercial property in the next 6 months so slightly increase the normal weighting.

The model mix of asset classes then is set each quarter. This provides the basis for our own guide in constructing client portfolios.

There will be a different mix for attitude to risk 3 aiming for growth. As there would be a different mix for attitude to risk 3 needing income, and so forth.

Behavioural Finance: Explains how people behave
The Economists assume people behave rationally but in reality - we behave emotionally. People react much more strongly to say a 10% drop than a 10% rise. We can be prone to panic and want to sell when markets fall. If fund managers are forced to sell when markets are down, to meet demand for investors bailing out, then they are not getting the best price so it has a knock on effect to the performance of their fund. Furthermore, the average person is more likely to wait until the markets rise before wanting to buy in. Buying high and selling low is clearly the worst way to make money. Given this information - we are now being pro-active in selecting funds for our clients to invest in which have lower volatility, but still offer the potential for out performance over the medium to longer term. Funds which we believe will produce a smoother return and funds which when combined with other funds will create an overall more smooth, but positive return.

Attitude to investment risk - psychometric profiling to help
It is very important to make sure people fully understand investment risk and what a fall or rise in the value means to them. If people invest in funds that are too adventurous for them, and panic sell at a low point - it can take a long time, if ever, to recover from. There is also a risk of being too cautious and in that way achieving a lower, underperforming return because less risk was taken than could have been. We are now asking clients to complete a 14 point questionnaire from which we then input the results into a program which produces and explains the attitude to risk profile more suitable for those particular answers. The client then checks the result and makes sure they are happy and agree with the assessment.

Quantative analysis of funds - crunching the numbers
There are thousands of funds spread across 30 sectors available for retail investment. We measure their comparative performance. We do this not over the last 5 years, or since launch but over many many discrete periods so we can measure both return in the sector and volatility. We want consistency and reduced volatility. We favour active funds more than trackers. We believe there are good funds that can beat the index and they only have to do it more than 50% of the time to increase returns.

Qualitative analysis - looking under the bonnet of how did they do it
There are thousands of funds spread across 30 sectors available for retail investment. We measure their comparative performance. We do this not over the last 5 years, or since launch but over many many discrete periods so we can measure both return in the sector and volatility. We want consistency and reduced volatility. We favour active funds more than trackers. We believe there are good funds that can beat the index and they only have to do it more than 50% of the time to increase returns. This relates to the "Quant analysis" detailed above.

Qualitative analysis - looking under the bonnet of how did they do it
Once we have narrowed down the vast range of funds available by using the "Quant analysis" we go further to establish what kind of skills and approach was it that was used and do we think it will be repeatable in the future.

Was it achieved by a star fund manager or a team? Does the star still do hands on fund management or are they more involved in other roles diluting their time now? Do we believe the fund managers have flexibility to adapt to future alternative investment environments. For Example if the manager wanted to sell Vodaphone - but the house rules say they cant reduce holdings more than 5% form the benchmark do they have to keep more than they want to? Was their past success just because they were good in a particular area that was in favour, but they don't really have evidence of their skills in different market conditions - or do they have the skills, and pedigree to continue to produce good results consistently in a variety of changing markets?

 

Model portfolios

Each quarter we decide which funds in the particular sectors are our favoured funds. The ones we now say have passed the Funds IQ test. These are the ones we will generally recommend for new investments and when reviewing existing portfolio's, while taking into account other factors such as clients specific preferences or objectives.

For some clients it might make sense to adjust an existing portfolio to match the new mix and selection of funds. For others is may not be so wise - for example there may be restrictions within the wrapper you are in, or tax or charge implications. Each situation has to be considered separately.

We hope this provides a bit more info on what we are doing behind the scenes. For further information specific to you - please contact your financial adviser or discuss at your next review.

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