Our main objective is to deliver a successful investment experience for every client.  The vast majority of people think investment advice as some kind of forecast that will tell them when the market is going up or down, or which shares to buy or sell.  They spend all of their time looking for an advisor or financial guru who can give them the important investment forecast that will make them a successful investor.  The reality is that nobody can predict the future.

We act as your personal finance director to maintain discipline between you and your investment portfolio, to ensure you benefit from a successful investment experience.  Clients feel very comfortable in the knowledge that their Investment Plan is engineered to benefit from market returns.  You are less likely to deviate from your chosen path.

There is a written Investment Plan to help you achieve your objectives
Because each investor’s situation is unique, and an investment plan will address the main factors, including the reasons for the investment, the investing horizon and the degree of risk that the investor can comfortably tolerate.  The written investment plan helps to guide us as we work to achieve your long-term financial success.

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One reason for the reluctance of many investors to invest into the stock market is due to the many stories of companies and stocks that have suddenly come on hard times. Some investors imagine their investment in the stock market will be like that—just when a stock has gone very high, it may be just the time that it is about to fall sharply. The mistake of this line of thought is forgetting that while a single stock may rise or fall dramatically, the movements of the overall market are much more subdued.

Modern Portfolio Theory provides the reason. It explains that two effects govern the movements of every stock market event and stock-specific event. It is primarily the stock-specific events that cause individual stocks to move up or down wildly. You may think that your best protection against stock-specific risk is to have portfolio managers that know all the companies in your portfolio well.

The trouble is that the events that cause the most damage to stocks usually come as a complete surprise. A company may have a sudden product liability problem, or the chairman may die or come under a cloud. On the other hand, the company may make a surprise new product announcement, or land a major contract. These events are often unanticipated, and so they cause price movements that not even the best portfolio managers expect. In fact, Modern Portfolio Theory tells us that if the market can anticipate an event, then the effect of the event is already evident in the stock’s price, and no further profit from knowledge of the event is possible.

If it is a surprise that professional portfolio managers cannot anticipate the events having the greatest effect on stock prices, then how can an investor protect a portfolio against them? The answer is diversification. The movements of specific stocks may not be predictable, but over a diversified portfolio they tend to cancel one another out.

We can build diversified portfolios to greatly reduce stock-specific risk, but that market events, which affect all stocks, are not diversifiable. Fortunately, the theory predicts the market will reward us for taking this risk by giving us generous long-term growth potential. The asset allocation decision is where we decide how much stock market investments we should hold in order to pursue this long-term growth.

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Investors often ask when it is the best time to enter the market. For a long-term investor, the answer is “today.”

There is no short-term investment opinion behind this statement. No one can predict the movements of a market for the next month or year*. Just as with unanticipated events, if portfolio managers could somehow predict the future movement of the market, then prices in the market would already reflect that knowledge, and so it would be impossible to profit from it.

Even though there is always a danger that the market will go down tomorrow, today is the right day to start investing. The following chart shows why. A major part of the long-term gains from investing in stocks comes from sharp upward bursts. Just missing the best month out of each calendar year over the past 50 years would have resulted in dramatically lower returns than staying invested throughout the period. £1.00 invested on March 1, 1955 in the FTSE All-Share UK Index would have accumulated to £ 393.99 by December 31, 2004 . If you had missed the best month out of each calendar year, your £1.00 invested in 1955 would have grown to only £ 5.32 over the following 50 years.

The opportunity costs are even more dramatic with small company stocks. Investing a pound in the DFA UK small company fund beginning in March of 1955 would have grown to £ 1,484.54 by the end of December 2004. If you had missed the best month out of each calendar year, your £1.00 pound investment in 1955 would have grown to just £ 33.11. Smart investors stay invested for the long term.

* For an intelligent and entertaining discussion of this issue, see Burton R. Malkiel, A Random Walk Down Wall Street.

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For most people, building a truly diversified portfolio is difficult. Imagine that you wanted to build a diversified portfolio of 500 stocks worldwide. To do a good job, you may need to have £ 5 million or more to invest. Many investors do not have, or choose to invest, this much.

Even if you have enough money to build a diversified portfolio, you may not have enough time. Choosing 500 stocks that you can buy with confidence is difficult enough. Once you bought the stocks, you would still have a lot of work ahead of you. You would receive masses of information on a large number of companies, and you would have to review your portfolio regularly to decide if it still suits your objectives. It would be a lot of work to calculate the performance of your portfolio, and decide if it was good or bad.

A better way to implement a diversified portfolio investment is through institutional asset class funds. In a single transaction, investing into an institutional asset class fund gives you a broad diversified portfolio in a specific asset class. These institutional asset class funds combine your investment, with those of other investors, to build up a pool of money large enough to buy a diversified portfolio. The portfolio manager’s full-time job is to make sure the securities in the portfolio continue to be suitable for the fund.

Many investors feel that they could have invested better than they did during the last few years. Unfortunately, most investors are using the wrong tools, putting themselves at a significant disadvantage to institutional investors.

Almost all investors would benefit by using institutional asset classes. An asset class is a group of investments whose risk factor and expected returns are similar. Until recently, many of the institutional asset class funds we use were not available to UK investors.

Also, the minimum investment for each of these funds is often high, effectively removing them from our reach. However, we have overcome this barrier to entry, and our clients have access to these institutional asset class funds.

There are four major attributes of institutional asset class funds that attract institutional investors:

Lower operating expenses

All managed funds have expenses, which include management fees, administration charges and custody fees. These are charged as a percentage of a fund’s assets, and the basic annual fee alone, for a retail fund, is often 1.5 %, compared to a 0.50%*** maximum in our portfolios. If all other factors are equal, lower costs lead to higher rates of return.

Clients gain the same cost advantage that previously only large institutional investors received.

*** These figures are not the total expense ratios

Lower turnover resulting in lower cost

Higher turnover, actively buying and selling, is costly to investors because each time a trade is made there are transaction costs, including commissions, spreads and market costs. These hidden costs may amount to more than a fund's total operating expenses if the fund trades heavily, or if it invests in small company stocks whose trading costs are often very high.

Institutional asset class funds have significantly lower turnover because their institutional investors want them to deliver a specific asset class return with as low a cost as possible.

Easier tax planning

Capital gains tax planning is easier with an institutional asset class fund compared to holding a portfolio of individual stocks. When stocks are traded within a fund, no capital gains are realised. Gains are only realised if the investor chooses to sell, or part sell a fund.

Consistently maintained market segments

There is strong evidence to show the most important factor determining portfolio performance is asset allocation—how your money is divided between different asset classes. However, you can only accomplish effective asset allocation if the investments in your portfolio are consistent, and stay within their target asset classes.

Institutional funds are good, as their investment mandates insist they stay fully invested in the specific asset class they represent.

On the other hand, most retail funds effectively have you relinquish control of your asset allocation.

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The Portfolio Management Process is not a one-off event, as it is ongoing to ensure we stay on track. The process has four distinct parts, as illustrated below.

Gap Analysis

This is an evaluation of your current situation and considers the planning needed to maximise the probability of achieving the goals that are important to you.

Asset Allocation

We use Modern Portfolio Theory to determine the proper asset class selection to meet your financial goals. We periodically review each asset class to determine if it is still appropriate to your overall plan.

Manager Selection

Although decisions about asset allocation are the most important to your portfolio, we also evaluate the managers on an ongoing basis. In particular, we look for their ability to deliver consistent returns within their asset class in a cost-effective manner.

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