Investment Philosophy

James King – 29th June 2020

A 2018 study by Dalbar suggests that the traditional route of identifying Fund Managers consistently outperforming in their sector or industry, (“Fund Picking”), seems to have fallen by the wayside.

It appears that no fund manager is reaching these performance levels, and that over the past two decades, the S&P 500 gave an average return of 7.20% per annum. The average US Equity fund gave a return of 5.29% over the same period.  The average annual return over the last five years was 15.79% for the S&P 500, but only 10.93% for the average US Equity Fund.

Even with constant detailed research, it is becoming harder and harder to find active fund managers who consistently outperform the relevant index. This leads to a constant change of fund manager as you search for the next strong performer; not an easy task to do with any degree of consistency.

It may be that some of this underperformance is down to fund charges, however it feels there must be something else contributing to this loss. 

Active versus Index.

Investment performance is split into two elements:

  • The market return. (Beta).
    This is the return you could expect if exposed to all of a particular market.  E.G: If the FTSE AllShare went up 10% in a given period, the Beta UK Equity over that period would be 10%.
  • The managers contribution. (Alpha).
    This is the return achieved from the managers investment decisions. E.G: If a manager achieved 11% growth, his Alpha would be 1% i.e. 11% -10%.

Issues can arise when the Alpha is negative, if a manager makes a wrong decision, or if the management itself comes with a cost.

To make investing in an actively managed fund worthwhile, it is essential a manager achieves an Alpha sufficient enough to cover any additional costs, in comparison to investing in some form of index. For some time now, it has been clear that it is extremely difficult for a manager to consistently outperform their peers and the relevant index.

As a firm therefore, we support an Index based strategy to take advantage of the Beta at a reduced cost, in comparison to active management.

Core Beliefs

There are core factors which apply when considering investments, some that relate to the investor themselves, some to markets and the ways they work. However, at the core of all of this, are the beliefs that influence how we manage client’s investments.  These include:

  • The worry caused by a given loss is greater than the pleasure created by an equivalent gain. Therefore, a strategy that looks to provide wealth preservation is attractive, achieved by a diversified portfolio that reduces volatility.
  • Trying to pick next year’s winning market is next to impossible and a very high-risk strategy. We therefore maintain a long-term strategic asset allocation with relatively modest variation in the shorter term.

We need to focus on what we know is certain and can control. We cannot influence how well a particular market performs, or whether a particular fund manager will maintain a good run.  What we can control is the percentage we invest into each market and the cost of making those investments.  In most cases, we buy Exchange Traded Funds (ETFs) as a low cost way of obtaining exposure to various markets.  This also allows us an allocation into specialist markets such as commodities.

This investment Blog is published and provided for informational purposes only. The information in the Blog constitutes the author’s own opinions. None of the information contained in the Blog constitutes a recommendation that any particular investment strategy is suitable for any specific person. Source of data: Bloomberg, Tavistock Wealth Limited unless otherwise stated.  

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