8 minute read
WAVERTON
from DFM Bulletin Issue 1
by rsmr
John Bellamy, Head of Adviser Solutions, Waverton Investment Management WHICH PORTFOLIO TYPE MIGHT BEST MEET CLIENT OBJECTIVES?
As difficult as this period In the protracted period of steady, has been for advisers, if unspectacular, economic growth and paraplanners, asset managers consistently rising markets it was all too and clients, we must keep easy to be charmed by the top-quartile all things in perspective. returns of investment services coupled with All around us are frontline the promise of active management and key workers doing far more downside consideration. The problem being important, valuable and that whilst stellar historic returns are easy dangerous jobs and for that we thank them. to demonstrate the protections within are Having said that, as advisers the recent setback has provided the perfect opportunity to review your preferred investment solutions (and those on the bench) with the benefit of a full investment cycle behind you.Whatever volatility awaits in the coming months and We are hearing of most active managers falling in to one of two particular not. There are too many stories now of clients in all mandates receiving 10%, or even 20% drop letters during the downturn which goes to prove that there is more to active management than glossy slides and riding the risk train. Equally, there are beyond, you can now judge your providers through camps. The hares well known investment houses that are rightly one of history’s longest bull markets and, most recently, or the tortoises. lauded for their caution. Positive returns in the through a surprising, last great sell-off in 2008 savage and swift bear and outperformance in Q1 market. It is important that 2020 speak to investment advisers are armed with this processes that really are information so that they can communicate doing something very different. However, if effectively with their clients in terms of these same processes were delivering little how the selected portfolios have performed, or none of the upside in the intervening whether any changes are to be recommended years then surely they are guilty of reckless and the reasons for those changes. conservatism.
We are hearing of most active managers falling in to one of two particular camps. The hares or the tortoises.
Maybe neither the tortoise nor the hare won this race?
There is a middle ground. It starts with a clear understanding from all parties (investment manager, adviser and client) of what the client’s objectives are, followed by a clearly articulated process to deliver these objectives within appropriate risk parameters. The challenge for the investment manager is to meet these objectives in such a way as to participate reasonably in rising markets and also protect from the worst of the ravages of the downside.
This challenge can be met with a broadly diversified portfolio that gives exposure beyond the traditional asset classes of bonds, equities and cash. It requires the managers to make full use of these tools and the discretionary permissions that they have been trusted with. So when the process is reviewed there is clear evidence of active (proactive not reactive) management through the last full cycle. There should also be good examples of how the portfolio construction dampened down the volatility of returns without minimising the gains in positive markets.
We find that such portfolios are best constructed from direct holdings (equities and bonds) rather than through a fund of funds approach. This allows for more control of the portfolio and a multitude of risk levers to pull through the cycle. Within such portfolios there is no reliance on third party managers to make the right calls at the right time. Using this approach allowed us to enter the crisis underweight risk assets. We did not see the crisis coming, but we did see an equity market that was looking fully valued and an economic outlook that was challenged. With this in mind, over the course of the preceding 12-18 months we gradually reduced equities and corporate bonds in favour of lower risk sovereign debt and alternatives. At the same time our long-term strategic hedges were increased.
For portfolios managed on third party platforms it is not straightforward to deliver the necessary diversification, in particular the hedging instruments. The fact is that most managers are reliant on the limited funds that are available and these are not always there across all platforms. Whilst past performance cannot be guaranteed, at Waverton, we find that our portfolio construction (blending five asset class funds: Waverton Sterling Bond Fund; Waverton Global Core Equity Fund; Waverton Tactical Equity Fund; Waverton Absolute Return Fund and the Waverton Real Assets Fund) has worked well, allowing for a more sophisticated approach that enables delivery of consistent client outcomes regardless of where the assets are booked.
These measures, and others, whilst costing a few basis points of performance in 2019, made a significant difference to the relative experience of clients in the last quarter. And while this approach doesn’t aim to “knock the ball out of the park” on the way up, it does allow for all to sleep well at night knowing that, as more testing times come, they’re better protected than the hare and they enjoyed more of the journey than the tortoise. n l We would be delighted to discuss Waverton’s
approach in more detail with you. If of interest please contact Mark Barrington, Head of Intermediary Sales: mbarrington@waverton.co.uk +44 0207 484 2058
Matthew Yeates, Senior Investment Manager, 7IM THE GREAT BIG NATURAL LIE
Organic. Free range. Natural. In the UK, some of the largest payers When I see these words on historically have been banks and oil a weekend brunch menu, companies. Not long ago we found ourselves I know two things — I’m writing about how HSBC suspended its expecting high quality dividend for the first time since the Second produce… and I’m going to World War, with all other UK banks pay for it! Most of us regard following suit. And the oil companies aren’t natural food as unequivocally much more reliable – plunges in the price of good – with no additives or preservatives or oil aren’t good for pay-outs to shareholders! anything unexpected. In some cases dividend payments from
‘Natural’ means “not made or caused by entire countries are being halted, like in humankind”. It seems absurd that the idea France and Germany. For investors with a should be applied to anything in finance, long term-time horizon this looks like an which is created entirely by humans. And investment opportunity, but if you were yet time and time again we hear about relying on those dividend payments for
‘natural’ income, as the media and investment income this year, you’re out of luck. managers push high-dividend stocks Income in retirement and income-focussed funds. It seems absurd When people investing for retirement stop working,
But, despite what many believe, that the idea should suddenly they have a new investment need, a
‘natural’ doesn’t automatically be applied to new goal. Rather than accumulating wealth and mean quality. And it certainly doesn’t anything in finance, trying to maximise the size of their nest egg, they want mean guaranteed. Buying a stock just which is created an income to live from that will last. because it pays a high dividend is a weak investment strategy. If the managers of a business think their shareholders would be better served by cutting the dividend and reinvesting in the business, they have every right to do so. Investors looking for a portfolio that maximises their chance of meeting their retirement spending needs should not view income assets and capital growth assets as separate things. It’s better to focus on the total return of portfolios, incorporating both entirely by humans.
Then of course, there are external events capital returns and income. After all, income that impact the payment of dividends and can be created by selling the proceeds of reminds us that ‘safe’ dividend-paying firms capital growth just as easily as from ‘natural’ are not necessarily safe at all. Unsustainably dividend payments. high dividends usually end up being cut – as we’re seeing now in the current coronavirus climate. Sometimes they even disappear altogether. So why do people follow the natural income approach? The most common answer is that focussing on the dividends of
investments “leaves the capital intact”. One of the best kept secrets in finance is that this statement is absolutely, 100% not true. Assets that pay an income (e.g. when a stock pays a dividend) drop by the value of that dividend on the day that payment is made, i.e. the capital isn’t left intact at all. People often don’t realise this, simply because the size of the individual drops is so small.
At 7IM we believe in a longterm, total return approach to retirement income. To allow us to take a long-term approach we split investments into different pots that provide for short-term income needs, longer-term needs and a buffer to provide income when periods of volatility arise. We have rules in place to follow for rebalancing portfolios when markets are up or down. We have
built systems to test those rules through periods like the last few weeks and much worse, covering thousands and thousands of different potential outcomes.
This approach allows us the flexibility to look across all types of investments, not just those with high levels of ‘natural’ income. It allows retirees the flexibility to work out how to spend their total return in retirement, without worrying that they’re getting a little less this year from dividends. n l Find out about how the 7IM DFM team
