Managing Client’s Investments
We have developed a robust process for the selection and implementation of investments, whether the funds are held in pensions, ISAs, general investment accounts or investment bonds. It is important to bear in mind that this is a process and not a fund or range of funds. Each client will have their own holdings, which are determined by their individual circumstances.
Client Objectives & Risk Profile
The process begins by ascertaining what the clients want to achieve and their 'risk/reward profile'; not only how much risk they are willing to accept in the pursuit of investment gains but also their 'risk tolerance' and 'capacity for loss'. These terms are explained and discussed in more detail in Appendix 1 - 'Risk'.
Strategic Asset Allocation
The growth targets needed to achieve the objectives, along with the risk profile, will determine the initial asset mix – the proportion of money invested into gilts, bonds, equities, property etc. There are, in fact, virtually an unlimited number of asset classes if we include esoteric investments such as commodities, fine wine and works of art. For our process we have defined 19 asset classes, which is a su?cent number to cover the spectrum of modern investment markets:
- 9 Equity classes
UK (sub-divided into small, medium, large and high dividend companies), US, Europe, Japan, Asia & Emerging Markets.
- 3 Gilts classes
Short, medium, and indexed-linked.
- 2 Corporate bond classes
Investment grade and sub-investment grade.
- Overseas government bonds
- Equity Long-Short (short bias)
- Real Estate (Commercial Property)
We refer to the initial mix as the Strategic Asset Allocation – the investment mix which should meet the clients’ objectives in the longer term in terms of performance and risk levels. As an example of this, a medium risk 'balanced portfolio' asset mix could be:
We are able to show the performance of this asset mix compared to the anticipated return based on historical data and indicate the level of risk by showing the maximum peak to trough fall during the last ten years:
Actual cumulative value (£269) versus anticipated value (£225)
The chart illustrates a loss of -15.7% between October 2007 and February 2009 for this portfolio. The performance over the last ten years has been growth of 6.83% per annum against an anticipated growth of 5.7% per annum.
We hold regular Investment Committee meetings with our external advisors to debate our views on the market and the reasons why some asset classes are likely to over or under-perform. We will then recommend which holdings should be increased or decreased due to market conditions. Our prime consideration is the preservation of capital and therefore we will normally suggest reducing any asset class which looks overvalued. Asset classes are described as being 'favourable', 'fair' or 'unfavour- able' as shown in the enclosed Tactical Asset Allocation report.
Below is an example of tactical changes recommended during a recent period of expected growth:
Executing the deals
So far we have not discussed any actual investments. There have been many studies which show that selecting the correct asset classes has a much greater effect on returns than selecting an individual investment within the asset class. That is, it is much more important to decide how much should be invested in, say, emerging markets equities than it is in picking an emerging markets fund.
There is also an ongoing debate as to whether the additional fees charged by fund managers are warranted when compared to less expensive funds which simply track a market index. At Cormorant we o?er our clients the choice of using any type of investment but our preferred choice is to create a portfolio consisting largely of inexpensive Exchange Traded Funds (ETFs) and tracker funds unless the performance of an active fund justifies the additional fee. For more information on ETFs please see Appendix 2 – 'Investments'.
On-line trading platforms
The last few years have seen numerous internet-based trading platforms appear, which are now being used by most investment advisers and their clients. These platforms make it easy to trade, monitor and review investments on-line. The platform market is still developing, and we will select the most appropriate platform to achieve our clients’ objectives. Clients are able to view a valuation and monitor the performance of their portfolio at any time by logging into to their platform account.
Our goal is to identify both actively and passively managed funds, Investment Trusts and ETF’s which are relevant to the asset class in which we wish to gain exposure. For example, in the case of ‘UK Mid -Sized Companies’ we will seek a fund which restricts the manager’s activities to investing in stocks contained in the FTSE 250 Index. In this manner, we can be more certain that the fund will remain relevant in the forward period and can be contrasted with an approach that examines ‘current asset exposure’, which may vary considerably in future.
Our three-stage approach to security selection
There is a tendency for investors and advisers to compare funds on a ‘raw performance’ basis without taking into account the di?erent risk profiles taken by the fund managers. Our performance analysis gives preference to those funds which have performed comparatively well on a risk -adjusted basis – we use the Sharpe ratio over a 36-month period. Ordinarily this requires that a fund has a track record of at least three years.
Our next criteria is the cost of running a fund, which represent a hurdle for managers to overcome in the course of delivering positive risk-adjusted returns. In the process of assessing the extent of costs, reference to the annual management charge alone is of limited use; there are additional charges to funds’ assets that are not included in the quoted annual management fee. The only readily available means for estimating true recurring costs to the investor is the ‘Ongoing Charge Figure’ (OCF), though in practice, even the OCF will underestimate the full impact of costs. Preference is given to those funds that exhibit reasonable costs in the light of risk-adjusted performance.
Preference will be given to those funds with teams with longer tenures of management and with a reputation for good post-sales support. Finally, we will also give preference to those funds with higher fund ratings from Morningstar OBSR.
A full list of our current Security Selections is available to our clients
Costs and charges
Cormorant does not charge separately for our investment process. Our fee is 1% pa of the value of a portfolio to provide our clients with a full financial advisory service. An initial establishment fee may be charged depending on the complexity of the work. Please refer to our Client Service Proposition for a full description of our offering.
In addition to this fee, there will be some other third-party costs, which may include;
- A 'wrapper cost' – e.g. the cost of holding your investments in a tax wrapper such as a Self-Invested Personal Pension (SIPP) or O?shore Bond.
- Dealing charges – e.g. there is often a charge of around £4 to £12 per trade.
- Platform charge – some platforms currently charge a small percentage, typically 0.25% of the value of assets, for using the platform facilities.
- Underlying charges based upon the fund value – ETF's cost between 0.1% pa and 0.7% pa approximately. Actively managed unit trusts and OEICS can charge around 1% pa and hedge funds around 2% pa with a 20% performance fees.
Fees and costs are important and will affect your overall returns. We work with you to keep the total costs as low as possible and all transactions are carried out with any 'soft commissions', 'marketing allowances' or other income rebated for your benefit.
The above investment process is designed to provide a sensible and realistic 'core portfolio' for our clients. In addition, there is an argument for holding less traditional forms of investment including:
- Venture Capital Trusts (VCTs)
- Enterprise Investment Schemes (EIS)
- Specific commodities such as gold, silver and oil
- Green energy solutions
- Private equity
If a client wishes, we can allocate a proportion of liquid assets towards these esoteric investments
We have listened to our clients and produced a simple, robust and transparent investment process which we hope is easy to understand. The enclosed appendices and Tactical Asset Allocation report discuss the process in more detail.