Investment Management: Helping you make the right choices

Back to basics Don’t worry if you’re confused by the enormous amount of choice in today’s investment market; most people are. At the simplest level all investments are made up of four basic areas known as asset classes:

Cash Fixed Interest (Gilts & Corporate Bonds) Equities (Stocks & Shares) Property (Commercial)

Understanding your attitude to risk

To start with we’ll talk to you about how much risk you are willing to take.

Everyone wants large gains - as long as this doesn’t mean large losses. As risk and return are related, understanding the amount of investment risk you are willing to accept is key to successfully reaching your financial goals.

You have to ask yourself two questions: How large a return would I like and how much risk am I prepared to accept?

To determine your attitude to risk we’ll have an in-depth discussion with you and ask you to complete the Risk Tolerance Questionnaire.

This will give us a better idea of how much risk you are willing to take on a scale of 1 to 10, with 1 being the least risk tolerant and 10 the most risk tolerant.

This means that if you have a risk score of 1 your portfolio is likely to have a modest return and limited fluctuation in value from month to month. If you have a risk score of 10 your portfolio is likely to achieve higher long term returns but may have sizeable monthly fluctuations.

Portfolio Management

Once we’ve established your attitude to risk we’ll spread your investments as much as possible across all investment types. This is diversification. Or simply put, we won’t put all your eggs in one basket!

This style of Portfolio Management is central to Modern Portfolio Theory as first published by Harry Markowitz back in 1952. Markowitz went on to receive the Nobel Prize for economics in 1990 and his research remains the basis for our investment strategy today.

Markowitz was among the first to quantify risk. He demonstrated how and why portfolio diversification reduces risk. His theory states that for any level of risk you can create a portfolio that delivers the maximum mathematical return. A portfolio constructed according to this theory places your portfolio on the Efficient Frontier.

An Undiversified Portfolio		A Properly Diversified Portfolio
	UK Equity Fixed Interest		Fixed Interest FTSE All Share UK Small UK Value International Small International Value Emerging Markets

The Efficient Frontier Efficient or Optimal portfolios are created when the maximum mathematical return for a given level of risk has been established. To do this we analyse every combination of assets and plot the results against the expected risk-return outcome for each combination. Then having established the expected outcomes for all the asset combinations, a line can be drawn to join up each of the Optimal portfolios at every risk level. This line is called the Efficient Frontier. No portfolios offer better theoretical Risk v Return profiles than those plotted on the Efficient Frontier.

Your Optimal Portfolio

We take the Optimal Portfolio as a starting point. Then we apply scientific research
(the 5-factor model) including a simulated returns programme created by Dimensional Fund Advisors.

This allows us to view the historical movement of major global indices since 1956. These indices are used as the target benchmark by most funds.

Why we choose Passive Fund Management over Active

Statistics show that there is no cost effective way to regularly outperform the market. In simple terms this means that active fund management does not work consistently and the additional charges involved further reduce the investment return.

We believe it is possible to create a transparently charged, well-diversified portfolio through passive investment. And it means you don’t pay the extra cost of an active fund manager to take additional risks with your money – often with highly variable success rates.

Read more on The Problems with Active Fund Management on and the Active v Passive debate [Sinquefiled article 1995]

Portfolio Rebalancing

Over time, as the funds within each asset class perform differently, the weighting between the funds, and therefore the asset classes, may change. So we’ll review your portfolio every year to enable us to rebalance it. This involves (with your agreement) selling units in some funds and investing the proceeds in others. That way the percentage holding in each fund is restored to the same percentages initially selected.

Need investment management advice? Please call us now on 020 8943 9229 to arrange an initial meeting.