Investment Philosophy

Our Investment Philosophy describes our approach to the provision of investment advice we will provide to you.

Outlook

It also outlines our beliefs about investment which form the foundations of how we manage your money and how you are involved with the decisions about investing; after all it is your money.

If you don’t understand anything here please ask us, there is no such thing as a dumb question when it comes to looking after your money!

Click on the links below to find out more about our investment beliefs, how we will work with you and invest your money.

Our investment beliefs

  1. Investors should understand the reasons for investing and how their portfolio is designed to meet their goals.
  2. A conversation about risk and its many dimensions is the essential first step when investing.
  3. Investing for the long term is very different than saving for the short term.
  4. The bulk of long-term returns come from asset allocation.
  5. Diversification using mainstream asset classes may reduce risk without destroying returns.
  6. Costs are certain and returns are not – so they deserve your attention.
  7. Tax and access are important.
  8. Investment success comes from the consistent application of a robust process.
  9. Success is often about the things you don’t do as much as the things you do.
  10. All investments carry risk.

 

Investors should understand the reasons for investing and how their portfolio is designed to meet their goalslayers

The world of investing can be complex and often not transparent. We believe in keeping things simple.

So while there is a lot of science and evidence behind our investment philosophy and process, we are keen that every client understands our recommendations and how they fit with their own financial objectives.

The first step of any investment philosophy is to understand the customer’s needs.

We explore this via a conversation with you and look into factors such as:

  • your need for capital security
  • your age
  • your family commitments
  • the need for income and/or growth and any future regular income needs
  • whether there is a specific item that needs funding e.g. school fees
  • your investment time horizon
  • your exposure to interest rate risk and inflation risk
  • the impact of charges and penalty fees
  • your attitude to risk, risk tolerance and capacity for loss

When delivering investment advice, we always start with a detailed understanding of your financial planning objectives. These inform decisions about the level of investment risk that needs to be taken.

back to top

A conversation about risk and its many dimensions is the essential first step when investingRisk

When it comes to investing, risk and reward are inextricably entwined. Don't let anyone tell you otherwise. All investments involve some degree of risk - it's important that you understand this before you invest.

The reward for taking on risk is the potential for a greater investment return.

If you have a financial goal with a long time horizon, you are likely to do better by carefully investing in asset categories with greater risk, like equities, rather than restricting your investments to assets with less risk, like cash.

On the other hand, investing solely in cash investments may be appropriate for short-term financial goals.

To help understand risk we break it down into four elements

1. Investment risk

These are the risks associated with different types of investment. There are many different risks (and rewards) but common ones include: volatility – the ups and downs; liquidity risk – can you get your money back when you need it; company risk – the risk that one company goes bust; default risk – the risk that a bond doesn’t pay you back; emerging market risk – the fact that some markets are less efficient and transparent.

2. The need for risk

All these risks might start to put you off. But even investing in cash carries risk e.g. inflation risk – your spending power goes down; default risk – your deposits may not be 100% safe. For some investors, and certainly, for short term savings, cash is still likely to be the best fit with your needs and objectives.

3. Your attitude to risk

Risk attitude has more to do with the individual's psychology than with their financial circumstances. Some will find the prospect of volatility in their investments and the chance of losses distressing to think about. Others will be more relaxed about those issues.

4. Your ability to tolerate risk/accommodate losses

If things go wrong what would that mean to your finances? You may be a risky investor but can you afford to be? You may be a risk adverse investor but are you saving enough? This is about understanding your ability to withstand the shocks that might come along with the aim of ensuring your portfolio meets your capacity for risk.

Generally speaking, a person with a higher level of wealth and income (relative to any liabilities they have) and a longer investment term will be able to take more risk, giving them a higher risk capacity.

Your ability to tolerate risk is very different to your attitude to risk – understanding this is a key part of our investment process. A conversation with you will help inform decisions about the level of investment risk that needs to be taken and that you can afford to take, rather than simply the maximum amount of risk that you feel happy with.

We will use a specialist risk profiling tool to help us establish the risk profile that is right for you. But we will also have a conversation with you about the profile to make sure that you understand what it means and how the profile needs to change to meet your particular situation. The great benefit of the tool is that it creates an unbiased view of your risk profile, and therefore is an excellent starting point for the conversation.

back to top

Investing for the long term is very different than saving for the short termAssurance

While there is an understandable desire to keep things safe when investing, the corrosive impact of inflation and thus the value of investing for the long term in more risky assets are compelling.

Real assets such as equities, property and commodities tend to make a better investment than the apparently safer option of cash deposits in the long run, but it isn’t that simple.

In the last 50 years, Equities have outperformed Gilts.

Table 1. Real returns (after inflation) over 50 years %pa.

Asset Class Return
UK Equities 5.5
Gilts 2.7
Cash 1.6

Source: Barclays Research 2013

But it isn’t the case over every time period – for example over the twelve most recent 10 year periods going back to 1902 (1902 – 1912, 1912 – 1922 etc.) – Equity returns were better than Gilts eight times, whereas Gilts beat Equities four times.

Our view is that basing investment decisions on the longer term historic behaviour of asset classes enables investors to participate in market growth. But that regular review is critical.

back to top

The bulk of long-term returns come from asset allocationDiversification

Academics will continue to argue about the precise amount of value that comes from strategic asset allocation rather than stock selection, investment style or market timing, but it is widely accepted that asset allocation has the biggest influence over the variance in portfolio returns.

This means that investors and their advisers should be devoting the bulk of their effort to constructing the most suitable asset allocation model, based on individual investment objectives and individual attitude towards investment risk.

This is where we focus our attention when delivering investment advice.

It’s like making a cake. The most important part is making sure you have the right amount of flour, eggs, butter etc. rather than worrying whether the ingredients come from Harrods or the corner shop.

We use the risk profiling tool to propose a suitable asset allocation to meet your needs based on long term historic information. We will discuss this with you to make sure that you are comfortable with the recommendations.

back to top

Diversification using mainstream asset classes may reduce risk without destroying returns.Choice 2

Diversification is a strategy that can be neatly summed up by the timeless adage "Don't put all your eggs in one basket."

The strategy involves spreading your money among various investments with the intention that if one investment loses money, the other investments may more than make up for those losses.

A diversified portfolio should be diversified at two levels: between asset categories and within asset categories.

So, in addition to allocating your investments among stocks, bonds, cash, and possibly other asset categories, you'll also need to spread out your investments within each asset category.

Investors may find it easier to diversify within each asset category through the ownership of mutual funds (unit trusts), rather than through individual investments from each asset category.

A mutual fund is an investment vehicle that pools money from many investors and invests the money in stocks, bonds, and other financial instruments.

Mutual funds make it easy for investors to own a small portion of many investments. A total stock market index fund, for example, may stock in hundreds of companies. That's a lot of diversification for one investment.

We use specialist fund managers to build portfolios, which are diversified at both asset class and stock level. But importantly they stay close to the asset allocation outcome which has been determined as appropriate for you.

back to top

Costs are certain and returns are not – so they deserve your attentionassets liabilities

Costs are certain and fund performance is not. It, therefore, makes sense to reduce costs wherever it is safe to do so. One of the major issues in fund management is that not all the costs are transparent.

There are three main costs with investing in funds:

1. Annual Management Charge (AMC) – is the fee that the manager charges.

2. Total Expense Ratio (TER) – this is the AMC plus legal, audit, depositary, safe custody and other costs;

3. Trading costs – these are the costs of buying and selling the investments inside a fund. These include stamp duty, bid/offer spreads, stockbroker commissions, the costs of settling transactions etc.

Even though TERs are not the whole cost of running a fund, they are a powerful predictor of fund returns.

back to top

Tax and access are important

Making investment tax efficient is a sensible objective and wherever we can we will try to reduce the tax your investments will pay. Use of pension wrappers and ISAs will assist in this objective.

We also use new technology platforms, known as wraps or fund supermarkets, to hold your investments. These offer safety, access to your valuations (so you can see how your investments are doing) and tax wrappers (pensions and ISAs for example). They also allow us to move your money between funds cost effectively if we need to in future.

Investment success comes from the consistent application of a robust processattention to detail 2

There are numerous ways to approach the construction and ongoing management of an investment portfolio.

Without the application of a robust process, the emotional aspects of investing can prevent investors from making the best decisions. As a firm, we consistently apply a multi-stage investment advice process designed to deliver suitable advice to every client.

The outcome is tailored to meet individual objectives but the process itself is always the same.

As with any plan, we need to regularly review progress to make sure we are on track. We will discuss and agree with you the best way to achieve this.

back to top

Success is often about the things you don’t do as much as the things you do

We have some simple rules that we apply to all portfolios unless the clients specifically request a different approach:

  • No individual bonds/shares
  • No direct hedge funds
  • No direct unauthorised funds
  • Only use funds run by FCA regulated managers
  • If you don’t understand anything here please ask us, there is no such thing as a dumb question when it comes to looking after your money!

back to top

All investments carry risk. These are a few of the important ones.foresight

  • The risk that the buying power of your capital decreases over time.
  • The risk that the growth you experience is variable.
  • The risk that you might get back less than you invested.
  • The risk that you do not achieve one of your objectives.

How we invest your money >more

Our advisory process >more