Investment Proposition

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The reason we invest the way we do.

Investment is complicated. You start out with no knowledge and over time accumulate enough to help you to make valid decisions. But how do you know the knowledge you rely upon is true? In 2006 we set out to question our fundamental investment beliefs.

We looked at these beliefs whilst focussing on our core client proposition. We do not invest just for investment’s sake. We invest solely to match the growth and income requirements of our clients.

Our Investment Review

We analysed the past performance of investment managers, multi-managers and external discretionary fund managers. We looked at investments we had not previously used such as hedge funds, private equity, life settlements and structured products. We used only undisputed facts and ignored the marketing hyperbole and the exaggerated claims of the marketing teams.

We expected to find better consistent investment returns from “star fund managers” than the market itself could offer. We expected to find that “You get what you pay for”.

The indisputable facts we already understood

The conclusion we arrived at was that all our closely held beliefs remained the same. In normal times:

  • capitalism still works
  • risk and reward are related
  • diversification through asset allocation is the only free lunch available to investors.
The interesting discovery we made

The key issue we established was that costs were vitally important over the long-term timeframes relevant to our clients.

Our investigation quantified the total fees and costs incurred by the majority of investors on retail investment funds. The true cost is horrifying. The total expense ratios(TERs){{6}} quoted on the illustrations were only part of the story. There were numerous other transactional costs incurred by active managers buying and selling securities, including spreads{{7}}, market impact{{8}} and tax{{9}}.

Here’s how much a typical active fund costs per year

The total average annual cost for actively managed UK Equity Funds is more than 2.5% (and sometimes a great deal more) excluding any trail commissions paid to advisers. The long term equity risk premium{{10}} in the UK has been established as around 5%pa, so around half the investment returns achieved are being swallowed up in fees. The clients were taking all the risks but were receiving only half the rewards.

With around half the market returns lost in charges, it was therefore not a surprise to learn that few active investment managers consistently beat their benchmark market index after all costs are taken into account. Every fund manager seems to suggest they beat the index but there is a massive weight of evidence against that happening. And there is no evidence anywhere to suggest it is possible for us, or any adviser, to determine which managers will outperform in the future because there is practically no consistency and past performance is a poor guide to the future.

We don’t want to play that game anymore.

We concluded that the most efficient, reliable and cost-effective approach would be to house our clients financial assets away from insurance companies and employ a range of risk-rated, blended portfolios using institutional asset tracker funds for our clients’ investment needs. In doing so, we are effectively letting the market provide the returns needed to meet stated lifestyle objectives in an efficient and predictable way.

Our average TER is 0.34% and the platform cost to administer the assets is no more than 0.35%. Turnover and transactional costs are very low. Therefore clients can afford to take less risk to try to achieve the desired returns because they are not leaking large fees to managers, most of whom do not beat the index anyway.

We continue to develop our proposition

In 2012 we received permission from the FCA to act for clients in a discretionary manner. Our fund rebalancing and fund switching moved to warp speed when we were given permission to move in bulk across all of our clients, instead of the old way of switching one client at a time. Discretionary permission allows us to trade and secure shorter term gains in markets that are not climbing but simply going sideways. In short our discretionary permissions allow us to be pro-active not reactive.

We actively manage tracker investments


[[6]]What’s a TER?
The Total Expense Ratio is the generally quoted annual management cost of a fund. Unfortunately there are additional costs that are not disclosed.[[6]]
[[7]]What do you mean by spreads?
If you buy a second hand car the price the dealer gets is more than what he bought it for. The same is true for share transactions. The more transactions the higher the cost to the fund.[[7]]
[[8]]What is market impact?
The daily price of a share is dictated by the number of buyers to sellers. Large fund purchases or sales by large fund managers always distort the market against them.[[8]]
[[9]]What do you mean by tax?
In the UK fund purchases are subject to 0.5% Stamp Duty Reserve Tax. The higher the number of transactions the higher the tax drain.[[9]]
[[10]]What’s the long term equity risk premium?
You tend to be rewarded for taking risk in the long term. The risk premium defines how much in excess you should achieve from shares versus the return on Government Gilts.[[10]]