Given the rapid technological advancements and globalisation of financial markets over the years, investing has become increasingly more complex and complicated – not to mention opaque.
This lack of transparency was laid bare just over 18 months ago when one of the UK’s best known ‘star’ Fund Managers, Neil Woodford, told investors that they couldn’t sell their holdings, because many of his holdings were illiquid as they were in unquoted companies or small quoted companies, which amazingly, he didn’t realise couldn’t be sold at short notice! Compounding the problem, many of his holdings were in biotechnology companies which require a high level of specialised expertise to fully understand – and as a result, many were found to be worth a lot less than Neil Woodford paid for them.
However, this level of risk wasn’t at all clear to retail investors – in fact most investors had no idea what was driving Neil Woodford’s performance or what risks he was taking with their investments.
Unfortunately, many investment documents contain an array of complicated strategies and definitions, such as ‘delta hedging’, ‘short gamma’, or ‘rho trading’ – and while these strategies sound very grand and important, they say absolutely nothing about the potential investment risks, just like mortgage-backed securities were seen as a secure investment, until the global financial crisis in 2008/9 exposed how low quality the underlying loans were.
At my wealth we like to keep things not only transparent, but simple, by investing in three asset classes; cash, bonds and equities – as we believe that these are the foundations of every successful investment strategy.
Additionally, we believe that risk management is just as important as investment performance and returns. This means that while we will never shoot the lights out with our investment performance, our portfolios should hopefully allow you to have a good night’s sleep!
Our aim is to achieve a real return (i.e. above inflation) over the long-term, by investing in a diversified number of companies and investment funds from across global markets.
We have a dedicated, qualified and experienced Investment Management Team (rather than a maverick ‘star’ fund manager like Neil Woodford) who actively monitor and manage client portfolios by researching, selecting and blending equities and investment funds. As our Investment Managers have extensive access to these investment funds, it allows them to look at how each investment fund is positioned in terms of their actual and relative compositions. This means that they analyse the best way to blend these funds together to ensure that our client portfolios are fully diversified as it is pointless diversifying clients’ money by investing in a selection of different funds, if all those funds are all positioned in exactly the same underlying stocks and sectors.
For example, as a number of companies have reduced or cut their dividends over the past 12 months due to the coronavirus outbreak, many equity income funds (i.e. those funds that focus on investing in companies that pay dividends), are now starting to chase the same remaining dividend paying companies – and as a result, these funds have become similarly positioned, which obviously reduces the underlying diversification.
In order to diversify our clients’ portfolios, the Investment Team splits down the international section geographically (i.e. US, Europe, Japan, Asia and Emerging Markets) and the UK section, where we hold direct equities. These are then split down on a sector basis (for example, mining, pharmaceuticals, banks, etc.). This strategy allows the team to exploit the characteristics of each asset class, geography or sector, as one of each will always perform better than another due to different economic conditions.
The selections made by the Investment Team will differ in order to match different investor risk profiles – from a cautious strategy for low-risk investors to an adventurous strategy for investors willing to take more risk.
These risked portfolios have a benchmark allocation which we refer to as our ‘neutral position’. In order to make full use of our asset allocation, we have the ability to invest +/-5% either side of these neutral points if our Investment Managers believe this is where value could be added. This is referred to as our ‘actual position’.
my wealth’s ‘neutral’ and current ‘actual’ positions for the Cautious, Balanced and Adventurous portfolios are: