Investment Considerations from Accredited Financial Planners Midas Fides


Investment Considerations and PhilosophyClick to Testimonial

Regardless of the “tax wrapper”, the following constraints apply:

- Advisory Management Only

I have no discretion over, or control/ownership of funds – you do

- Risk Profiling and Asset-Allocation

The matching of clients’ risk/reward tolerance to asset-allocation to optimise returns close to the “efficient frontier” is paramount. Over 90% of attributable variability of portfolio returns is due only to asset-allocation, not to stock-selection, timing, style etc.
My asset-allocation model is operated by an internationally recognised investment management & consulting actuarial firm, updated quarterly.
Systematic market-timing risk can be mitigated by “drip-feeding” investment inputs, and phasing withdrawals.

- Rebalancing

Portfolios  are rebalanced annually to revert to optimal asset-allocation.

- Diversification
of geography, asset classes, market sectors, investment styles & fund managers to reduce correlation and risk whilst optimising return. Spreading investments across lowly-correlated asset classes means that if one class crashes, another might go up, reducing volatility.

- Whole of Market

Fully independent advice, unbiased by ownership issues; directly FCA-authorised.
Best managers and funds recommended from each sector  click to testimonial

- Minimal Cost and Transparency of Charges

Every penny is agreed in advance, disclosed and minimised.

- Passive vs Active

Most active fund managers underperform their target benchmark and charge high fees for the privilege. Very few add value consistently, and need to be monitored, hired/fired by me.

Fund and manager selection process uses “Modern Portfolio Theory” indicators (see glossary), and manager’s own career track record of real added-value.
Asset-class exposure can often be achieved more cheaply through “passive investing” in index-trackers, Exchange Traded Funds (ETFs) etc.
Some “multi-manager” funds are used where justified.

- Accessibility and Timescale

Contractual “tie-ins” and withdrawal penalties are avoided.
Funds are intended to be available on demand when needed.
Accessible cash reserve is always available as part of your plan.

- Long-Only

"Market timing" doesn't work.
I do not operate “market-timing” strategies, or practise stock picking, or hold/implement short term economic views.
A little-known fact is that there is no evidence of short or medium-term correlation between a country's economic performance and the movement of its stockmarkets/share prices. So why are investors obsessed with economic performance?
Economics is the “dismal science” – whatever the news is, it’s bad.
If all economists were laid end to end, they’d never reach a conclusion.
Having arrived at an optimal asset-allocation and fund selection, I stick with it through thick and thin and don’t advise “panic-selling” or “buying the peaks”.
This requires patience and discipline by both of us.
click to testimonial
click to testimonial

- Fee-based only

No recommendations advice or management are available without advance commitment by you to professional fee (on basis mutually agreed from menu), to protect you from commission bias/product salesmanship. The fee levels are justified by my qualifications, experience and track record.
Agreement usually includes performance fees with mutually agreed relevant benchmark.

- No guarantees

“Structured products” with illusory expensive guarantees are avoided.
No “hedge funds”, “absolute return” or “with profits” funds are recommended.
Investment risk cannot be removed without reducing return.
Guarantees are only as good as their guarantor.
All countries have at some stage defaulted on their government debt bonds (including the UK).

- Affordability and Goal-targeting

Portfolios are constructed in the context of wider lifetime financial planning and achievement of realistic financial goals and timescale.

- House style

Midas Fides favours bias towards small-capitalisation, value stocks, emerging markets, short-dated, rather than long-dated gilts, “bricks & mortar” commercial property funds rather than property shares, and an element of low-correlation alternative assets based on long term "supply & demand fundamentals".

Wrap Platforms

Diverse portfolios held & administered on one computerised “wrap” for online daily valuations, statements, transactions, with security of custodianship and availability of various tax-wrappers.

Glossary:

Alpha: When measuring two investments, such as a fund against a benchmark index, the alpha represents the theoretical return of the first investment when the second has a zero return (ie it represents the over- or under-performance of  a fund relative to its benchmark).

Beta: A measure of the sensitivity of an investment’s return to movements in its benchmark index. It is the amount by which the fund moves, when its benchmark moves by one. Eg. For a Beta of 0.5, if the benchmark rises by 10%, the fund would rise by 5%. The higher the Beta, the greater the volatility of the fund. An index-tracker would have a Beta of 1 (or very close to it).

Capital Asset Pricing Model (CAPM): A theory developed in the early 1960s which attempts to define and quantify the relationship between the expected return from a security and the market risk. Only the systematic risk of a security in a diversified portfolio will affect its return. Unsystematic risk can be diversified out of a portfolio.The expected return on a share equals: the risk-free return plus [the expected return on the market less the risk-free return] multiplied by the Beta of the share.

Efficient Frontier: If a number of investments/investment portfolios are plotted on a linear graph with “risk” as the X axis, and “return” as the Y axis, a line drawn through those plots furthest to the left and top will approximate to a convex exponential, called the “efficient frontier”. It represents the optimum combination of investments to maximise return and minimise risk.

Clearly, one would wish to be at the top of the “return” (ie “Y”) axis as well as at the bottom of the “risk” (ie “X”) axis, but this is not generally possible. There may be occasional exceptions, though extreme exceptions are skewed towards favouring lower risk (ie you cannot achieve huge returns with no risk at all, though plenty of people achieve no returns at all, or losses, and indeed not inconsiderable liabilities, by taking a lot of risk)

The range of possible optimal outcomes of numerous portfolios tends to show an exponential curve, called the “efficient frontier”. You want to be as close as possible to the “efficient frontier” once you have clearly and comprehensively established your risk/reward tolerance. Getting you close to the efficient frontier is a large part of the work I do, and is very valuable.

Relative Information Ratio: A measure of the standard deviation of the relative returns. It is the annualised standard deviation of  the returns of a fund divided by those of its benchmark index (the relative returns); and not the standard deviation of each fund’s returns. The lower the RIR, the more the fund resembles its benchmark or the market regarding risk and return.

R Squared: A measure of the quality of correlation between two sets of data, such as the performance of a fund relative to its benchmark. An R-squared of (positive) 1, means the fund has a perfect linear relationship to the index. Minus1 means an exact inverse correlation. R-squared of zero shows no correlation. The closer the R-squared is to zero, the more likely it is that the fund performance results from fund-management skills rather than index-tracking.

Sharpe Ratio: A measure of whether a fund’s risk and return is good or bad. It is
[ the mean annualised return of the fund minus  the putative return of a hypothetical risk-free asset] divided by the total risk
The higher the Sharpe Ration, the better. A ratio of less than 1 indicates that the fund is achieving a lower return than the risk-free return. It should be compared with those of other peer-group funds in the same sector for an indication of added-value.

Systematic Risk: This is the risk which affects the whole market, and cannot be diversified.

Unsystematic Risk: This is the risk attributable to an individual investment (eg a share), known as “investment-specific risk” and can be reduced by diversification of a portfolio.

Volatility: The monthly standard deviation, ie how much the fund’s price varies from  its average price over the last 36 months. The higher it is, the greater the risk.

David Gunnersen MSc  AFPC  APFS CFP

(Principal – Midas Fides)

  

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