Risk and Return
Underpinning our investment strategy is the requirement to understand the two integral elements of investing, risk and return, and how different asset classes and investments offer varying degrees of these.
Our aim is to ensure that firstly the client fully understands this balance and secondly that the client's investments reflect this so that outcomes are in line with expectations. This involves a detailed understanding of the risk/return characteristics of different asset classes and how they have behaved in the past.
Although we are interested in the short term fluctuations of investments, our focus is really on the medium to long term. Many of our clients have multi-generational funds where the emphasis is on protecting the purchasing power of this in decades to come and ensuring that the value of their wealth is not eroded by inflation.
Cash holdings, whilst providing short term protection, are likely to lose value in real terms over a number of years. On the other hand, a basket of good quality equities can provide real returns above inflation over longer periods of time.
Different asset classes provide different characteristics on both the risk and return profile. When constructing a portfolio we seek to diversify some of the risk away by blending different assets which have uncorrelated features. We will use a wide array of underlying assets including Equities, Government and Corporate Bonds, Commodities, Property, Alternative investments such as Infrastructure Funds, Absolute Return Funds and Cash.
Some of these asset classes can provide greater returns and more risk and others less returns and less risk. They also can behave in an uncorrelated way thus reducing overall volatility of a portfolio. We will also seek to have some currency diversification by holding international investments in addition to domestic holdings. The aim of asset class and geographical diversification is to not have all our eggs in one basket.
Whilst some of our investments are designed to produce capital growth only, such as smaller growth companies and commodities, our fundamental belief is that an investment should provide an income whether this is paid out or reinvested. An investment that pays a dividend or income is already giving a return, and if this is reinvested the powers of compounding come into play.
Over long periods of time, statistical evidence shows that the majority of the total returns on the FTSE All Share has come from reinvested income being compounded, with the remainder coming from capital. Our primary strategy is to therefore focus on investments, whether equities or bonds, that produce and grow sustainable levels of cash which can then be paid to the investor or reinvested.
Investors can get swayed by noise, rumour, news and opinion which affects emotions and ultimately investment decisions. We stick to 2 premises:
Firstly, solid fundamentals of a company will provide some security to the investment and should reward investors.
Secondly, markets are broadly efficient and technical analysis will give an indication of what `The Market’ thinks of a stock and the demand/supply relationship. We buy stocks for the long term with good fundamentals, where the charts can help us with our entry/exit points.