Our Investment Approach

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It’s all going to end in tiers.

Here I’m going to follow on from a couple of my recent blogs to explain the direction of our new investment portfolios. Please feel free to read those blogs again.

Ch-ch-ch-ch-Changes

Next February I celebrate 30 years in the business. It’s been a period of continuous change and that change just continues to accelerate. So when you log in to your accounts on Nucleus and Investcentre shortly, be prepared to see something different. Here’s the background to the changes we are making.

Diversification

In 1952 Harry Markowitz, Nobel Prize winning economist, described diversification as the only ‘free lunch’ when seeking investment returns. The idea that if you hold a combination of US shares, US government gilts and US commercial property, then returns will be smoother over time and not significantly lower than just holding shares alone. The theory has been manipulated over time to include holding foreign shares, emerging market shares, frontier market shares, private equity, venture capital, gold, silver, platinum, palladium, oil, diamonds, teak forests, etc. In fact just about all the complex, dodgy and just plain daft investment ideas today are pushed by salesmen quoting the above theory. “Thou must diversify, so buy our **** fund”.

1952-2016 The theory is 64 years old

How can you safely diversify into shares, gilts and property today?

Shares. We can invest in some of these. Fine.

Gilts. The yield (interest rate) the UK Government paid on its 15 year debt was steady at between 4-5% per year between 1998 and 2008. Prior to 1998 it was higher still. It now lies at a measly 1% per annum. So today we can lend the UK Government our hard earned cash for 15 years and get 1% per year in return. What’s the point? No thanks. This isn’t diversification; it’s an invitation to lose some money.

Commercial Property. We have just seen the first headless chicken panic set in within Commercial Property funds worth £billions, just because a referendum suggested we were going to leave Europe. Sometime. Maybe in 2.5 years time. Frankly rubbing shoulders with investors who panic is not a place I want to put my money. We got out of our property fund only because we were quick. The gates are supposed to re-open in a months time. Over 3 months since they were closed. I’m not going back in there.

Gold. Gold never featured in the 1952 research. It has found its way into portfolios today because it’s price usually goes North when the price of shares go South. It hasn’t always been that way. I can’t decide whether speculating on the future price of gold is the safest investment to make, or the daftest. It reminds me of the “bigger fool” theory. “If I speculate on the price of gold today, then I will need to find a bigger fool to buy my bet off me in the future”.

It’s hard to diversify at times like this. So after a quick post referendum smash and grab in the FTSE 250 index, we decided to play it safe and sit holding oodles of cash. It can’t last.

Around here however we don’t look backward for very long. We keep moving forward. Opening new doors and doing new things. – Walt Disney.

So here is how we invest going forward.

It’s now 4 years since the business obtained it’s discretionary permissions from the FCA, allowing us to turbo-charge the investment decisions we make for all of our clients. We can buy or sell investments across all of our clients in minutes now. But we still predominately use funds designed by others that hold shares traded on the London Stock Exchange. These conveniently packaged funds do however have an annual cost.

Why spend 1/2% each year to hold a fund that contains UK shares, when together we could just buy those same shares directly and save that 1/2% per year? Welcome to the next chapter. We are now about to take our investment proposition one step further and cut out the UK fund middlemen. Because we now hold £60 million between us, we can do just that. Even within individual smaller Pensions and ISAs.

Our internationally-based, themed funds in Health and Pharmaceuticals & Technology are impossible to replace at a competitive cost. They are priced in dollars and they have performed phenomenally well for us all. We will keep them. But our U.K. Shares and our UK Property allocation are about to become held directly.

The first change will become increasingly obvious to you shortly as we gradually replace 2 or 3 funds with 50 or 60 individual holdings. The second change will become more obvious over a longer period of time. Increased growth brought about by lower ongoing costs over the long term.

The Investment Tiers
  • UK Small Companies – 20 Individual Shares
  • Global Technology Giant Companies – 1 Fund
  • Global Health and Pharmaceutical Giant Companies – 1 Fund
  • Shares that help pay our personal direct debits. (Our UK Equity Income Fund) – 26 Individual Shares
  • Shares that pay us rent. (Our Property Fund) – 9 Individual Shares
  • Cash Balance – Instead of lending it to the Government, we will keep it as cash. We can use it occasionally to make a few percent here and there, then revert back to holding it as cash.

As has always been the case, the amount you hold in each of the tiers will depend upon your attitude to investment risk.

The Cautious will hold more cash, the Aggressive the least.
The Cautious will hold no small companies, the Aggressive the most.
The Moderate will be in between.

These changes will occur across ISAs, General Accounts, Pension Accounts and Drawdown Accounts.
It is difficult to achieve this diversification within on-shore bonds currently and so the changes within those plans will occur later.

Despite our increased workload to achieve all of this, our annual financial planning fees will remain the same, and the platform fees will be no different. There will be some initial costs incurred when all the shares are purchased initially as there is 0.5% stamp duty to pay. However each share purchase will be for at least £600,000 between us. We really do now benefit from the economies of scale buying together brings.