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  investment portfolios. Please feel free to read those blogs again.

Ch-ch-ch-ch-Changes

In February 1997 I celebrated 30 years in the business. It’s been a period of continuous change and that change just continues to accelerate.

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”.

1952-2020 The theory is 68 years old and counting

Is it time to allow this 68 year old theory to retire? Today, how can you safely diversify into shares, gilts and property?

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 continually below a measly 1% per annum. It’s threatening to turn negative too. So today we can lend the UK Government our hard earned cash for 15 years and get less than 1% per year in return. What’s the point? No thanks. This isn’t diversification; it’s an invitation to lose some money when inflation is taken into account.

Commercial Property. We saw the first headless chicken panic set in within Commercial Property funds worth £billions, back in 2008.  Then again in 2016 and again in 2019. The panic necessitated fund after fund declining requests from investors who wanted their money back.   Frankly rubbing shoulders with investors who panic on an ever increasing basis, causing funds to close to redemptions is not a place I want to put my money. We got out of our property funds twice because the first Rule of Panic is, never panic.  The second more important rule is, if you must panic then panic early.  We last invested in commercial property funds in 2014 and we are 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”. And lets get this straight, we pay to dig the stuff up and then we pay to put it back underground to keep it safe?

It’s hard to diversify at times like this. So after a quick post referendum smash and grab in 2016 into the FTSE 250 index, we decided to play it safe and sit holding oodles of cash. It didn’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 have invested since.

The business obtained its discretionary permissions from the FCA in 2012, 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 used funds designed by others that hold shares traded on the London Stock Exchange until 2016. These conveniently packaged funds did however have an annual cost which I was anxious to avoid.

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?  2016 welcomed in the next chapter. We took our investment proposition one step further and cut out the UK fund middlemen. We could do just that, because at that time, we held £60 million between us .

The first change become increasingly obvious to everyone as we gradually replaced 5 or 6 funds with 50 or 60 individual holdings. The second change  bacome more obvious over a longer period of time. Increased growth brought about by lower ongoing costs over the long term.  There isn’t much that we can control when it comes to investment, but controlling our costs ultimately leads to better long term performance.

The Investment Tiers

  • UK Small Companies – c. 20 Individual Shares
  • Shares that help pay our personal direct debits. (Our UK Equity Income Fund) – 20-26 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 portfolios will held 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.