Our Investment Philosophy is Based on These Core Principles:

1. There are three main asset class groups to invest in: cash/bonds, property and equities.
2. 90% of returns will be produced by the choice of asset class and only 10% by the choice of financial institution managing the individual selection of bonds, properties and equities.
3. Each client’s risk and return preferences should determine the appropriate mix of these assets in their portfolio and the style of management required.
4. So, our investment team focuses on asset allocation, which is finding the right blend of asset classes.
5. Our advisory team concentrates on identifying the special preferences of each client.

Understanding Asset Class Characteristics

• Understanding that different asset classes exhibit some consistent specific characteristics can help to predict a range of potential performance outcomes.
• Cash and bond returns are primarily a combination of the interest rate less the default risk. Bond and cash interest rates tend to maintain a relationship with expected inflation, and defaults tend to rise at times of economic stress.
• Property returns are a combination of rental income, rental growth and yields (the price to rent ratio). Commercial rents are generally fixed for long lease terms. At lease expiry, rents tend to increase or decrease in line with economic activity and supply of new stock. Yields tend to fall (that is to say that property prices increase as a multiple of the rent) when interest rates fall and/or there is an expectation of a future rise in rents.
• Equity returns are a combination of dividends, dividend/earnings growth and price to earnings (P/E) ratios. Dividends tend not to fall except in times of high economic stress. Dividends tend to grow in periods of economic growth. P/E ratios tend to rise (that is to say that share prices rise as multiple of earnings/profits) when there is an expectation of future earnings growth. It is important to note that equity prices are predictive so future economic growth does not necessarily cause future share price growth because it may already be factored into the share price.
• So, the main variables to predict are inflation, rental/profit growth and default risk.

Enhancing Returns by Measuring Asset Class Valuations

• It is very difficult to predict short-term movements in asset classes with any accuracy, but long-term returns can be enhanced by an overweight allocation to asset classes that appear undervalued compared to long-term trends and an underweight allocation to asset classes that appear overvalued.
• If Bond yields are historically high compared to long-term inflation expectations, then the asset class is probably undervalued so allocations should be overweight.
• When property yields are high relative to inflation, then the asset class may be undervalued, unless there is a strong economic trend driving down rents.
• When cyclically adjusted equity P/E ratios are significantly below long-term trends, then shares may be undervalued, unless there is a strong trend driving down future profits.

Delivering Better Risk-adjusted Performance Through Diversification

• There are many ways for clients to target a given return. It can be done with lower risk by investing in a mix of assets that, in combination, will produce the desired return but tend not to move in the same direction simultaneously. It is higher risk to invest in a single asset class that might produce that return, but you have no upside when that asset class falls.
• Within asset classes it is also lower risk to diversify across several bonds, properties or equities through a fund rather than investing in one specific asset.

Management Style

• For equities, our default is to recommend passive management on a global basis because it tends to be cheaper and more diversified.
  • However, we recognise that some active managers can outperform so we can explain the different styles and allow clients to choose if they have a preference.
  • Clients who are sceptical of the ability of fund managers to outperform are best suited to passive equity styles where possible.
  • Regional equity investing is becoming less relevant as companies become more globally integrated, so we favour global investing on a thematic basis such as growth, value, high yield or ethical shares to suit client preferences.
• For bonds, our default is to recommend active management because passive bond market weighting can be driven by the weakness of the borrower, which increases risk.
  • Bonds are normally the lower risk element of a portfolio, so we favour euro denominated bonds to avoid introducing unnecessary currency risk.
• Equity and bond research requires huge resources, so we favour large institutional fund managers over stockbrokers, and find no evidence that direct equity portfolios outperform equity funds. Funds also tend to have lower management fees than stockbroker portfolios.
• For property, it is generally only possible to invest in an active style and we favour a regional approach because property is a location-specific asset as the characteristics of different international property markets can vary significantly.
• Many investors like to relate performance to real-world experience, so we offer the option of tailor-made portfolios with segregated investment in each asset class.
  • This allows investors to identify the performance of each asset class and develop an understanding of the causes of performance.
  • This also allows us to use our asset allocation expertise to maximise performance.
• Where the size of the portfolio allows, we recommend diversification across different managers and styles, such as passive and active equity, different property funds which by nature hold different properties, and a variety of specialist bond fund managers.
• We also offer low-cost multi-asset funds if required.

Rebalancing

• Personal circumstances and market conditions will change over time, so it is very important to review portfolios and rebalance asset allocation on a regular basis.
• This should only be required annually unless there is extreme market dislocation.