Over the last year we’ve had the pleasure of working with the team at Albion to ensure that the portfolio being used to power your financial plan remains best in class. Last month, the investment committee met at Albion’s offices in Exeter with one task – to challenge. To challenge the investment philosophy and process, and ultimately the makeup of the portfolios themselves against the latest academic evidence as we seek to power your financial plan for the years ahead.
Before we get into that however, a reminder. We don’t make stock market forecasts and don’t make decisions about the structure of the portfolio based on today’s headlines. No one can know the future, and the events of today are broadly irrelevant to the ability of the portfolio to deliver for you over the decades ahead.
Instead, we focus on the long term and structure the portfolio to weather the wide variety of storms that will inevitably come over the horizon. As you’ll see, the fortitude and discipline to deliver “not much needs to be done to your portfolio except for rebalancing” advice, comes from this rigorous process of ongoing challenge.
First on the table at meetings of the committee is our high-level approach; in line with our objective to maximise returns, are we right to avoid the game of trying to beat the market by picking winning managers and moving in and out of the different sectors of the market as the months go by?
One lens to look at this through (we’ll consider others in future articles) is the percentage of fund managers who were successful in this endeavour over recent years. Data from SPIVA (https://www.spglobal.com/spdji/en/research-insights/spiva/) shows that over the last 15 years, only circa 11% of US equity funds and 12% of European equity funds were able to beat their respective index benchmarks. That’s to say that if you wanted to use this approach to deliver “outperformance” you’d have approximately a 1 in 10 chance of doing so over timescales just about relevant to your financial plan, with the other 9 out of 10 choices delivering returns below those delivered by the market.
Alongside this, we discussed the extent to which a small number of companies delivered an outsized portion of the returns of the global stock market over the last 90 years and explored the concept of risk as it relates to not holding those firms who will deliver this return for the coming 90 years. This is one of the often under-discussed benefits of global diversification, that you are virtually guaranteed to hold a very small proportion of future winners. Morgan Housel explores this concept a little more in an excellent blog post entitled Tails, You Win.
As such, we remain comfortable with the approach that we take. Letting the markets do the heavy lifting on returns means that we don’t need to worry about picking the right stocks, the right manager or whether we should be in or out of the markets at a given moment. This enables us to focus on the things within our control – portfolio structure, cost, and our own behaviour as investors.
The underlying assets – a word on fixed income
Next up for challenge at our meeting was to consider the assets we use in the portfolios, ensuring that there remains strong evidence for those that we include, and that nothing has changed with respect to those assets we don’t.
Given the recent movements in the fixed income market we’re focusing on the defensive side of the portfolio in this summary. We will address our conversations regarding growth assets in future articles.
We are clear that the defensive side of the portfolio exists with one simple aim; to dampen the volatility of the growth assets down to the individual tastes of the investor. We often use a whisky and water analogy here, with whisky representing the growth assets and water the defensive assets. We don’t ask the defensive side to provide return, and instead ask simply that it be an effective diluent at all points of the market cycle.
As we consider the asset classes that can fulfil this role, we find ourselves drawn to the short-dated, high-quality end of the bond market. Short-dated bonds (loans that are due to be repaid in 5 years or less) are much less sensitive to movements in interest rates than those with longer durations. The result of this is that short-dated bond valuations tend to remain relatively stable in comparison to their long-dated counterparts.
The market has demonstrated this in recent weeks, with long-dated gilts fluctuating wildly in value in response to the government’s announcements; an attribute that doesn’t align with the water-like properties that we seek on the defensive side of the portfolio. We remain comfortable that short-dated bonds remain the most suitable asset class to fulfil our needs in this department.
Fund screening process
The final step that we work through as an investment committee is to rerun our product screening process to see if any new funds are available that would enable us to align the portfolio more fully with our investment philosophy. An example of this could be where a new fund provides access to the desired asset class at a lower cost than an incumbent. There are a few new funds on our watch list having recently launched and we will keep these under review as part of our ongoing due diligence.
One specific change that did come to light however is that the iShares property fund that sits within the growth assets of the portfolio will shortly be changing its name and making an adjustment to the index that it tracks. This represents a minor tweak, but one that we wanted to make you aware of before you see it reflected within your portfolio towards the end of November. As this is simply a name change, there are no tax implications that require consideration.
As a result of this process, we remain confident that the investment philosophy we follow remains coherent and in line with the academic evidence and that the True Wealth portfolios represent the best possible implementation of that philosophy. We will continue to challenge our approach and look forward to reporting back to you once again in February 2023.
This article is shared for educational purposes and should not be considered investment advice or an offer of any security for sale. This article does not represent a recommendation of any particular security, strategy, or investment product. Information contained herein has been obtained from sources believed to be reliable but is not guaranteed.
Past performance is not indicative of future results and no representation is made that the stated results will be replicated.