What We Do
Investment
We offer internally-managed portfolios that allow us to customise solutions for most investment problems, at different levels of risk and with different risk preferences.
All portfolios are constructed to implement specific planning goals, as developed with clients in the initial planning phase of the relationship. The terms of reference for each goal-based portfolio, including time horizons, target outcomes and risk preferences, are specific to the goal rather than general to the client or the client’s ‘personality’.
The investment approach is highly quantitative. Portfolios are dynamically managed by us at the asset allocation level and implemented via collective investment vehicles or Exchange Traded Funds. We only manage portfolios of individual securities where our mandate is to replace these in a tax-optimal manner with one of the above.
As important is what we do not do, and why. We reject the typical ’factory wealth management’ process that relies on a small number of standardised variations of diversified portfolios to maximise managers’ economies of scale while claiming to offer customisation. We reject spurious ‘risk tolerance’ assessments, devised to validate shoe-horning people with very personal needs, preferences and constraints into one or other of these standard solutions. We reject ’active management’ at the level of fund or security selection that accounts for most private financial assets, whether advised by IFAs or managed by portfolio firms, because it makes unreasonable assumptions about skills and returns relative to total costs and is a bad bet for the investor. We reject judgement-based approaches to asset allocation which we believe cannot provide as consistent and rigorous risk management as quantitative portfolio techniques.
We also act in an advisory or supervisory capacity on a continuous basis where clients require:
- Liquidity advice
- Strategic asset allocation for their own third-party portfolios
- Manager oversight for third-party portfolios
All of these services include advising on the optimal ‘asset location’ strategy:
- How to hold assets between spouses
- Which assets to assign to which goals
- Optimal use of tax-favoured accounts
- Which assets and which accounts to use for rebalancing or drawdown
‘Defined outcome’ portfolios
Our model-driven, goal-based portfolios are called ‘defined outcome portfolios’ because they are customised to deliver an acceptable range of possible outcomes (after inflation) at defined times.
This explicit definition of acceptable outcomes, and the constant quantification of the probabilities of achieving the target outcomes as both market conditions and time horizons change, are (as far as we know) unique to our approach and only have parallels in the institutional portfolio management arena, in ‘Liability Driven Investment’ techniques increasingly favoured by defined benefit pension plans.
The characteristics that make defined outcome portfolios suitable for the financial goals of most individual investors are:
- The material benefits derived from the capial, either as future capital sums or cash streams (such as to meet retirement spending, regular income needs or pay down borrowings) are measurable
- The measurable benefits (how much, how defined, when) are entirely specific to each investor
- The actual realised outcomes are likely to have significant consequences for an individual’s welfare (such as in avoiding regrets about either spending too little or too much)
- Outcome certainty is a more important benefit of the capital than the uncertain path of the portfolio in the intervening years
- The volatile path of the portfolio is likely to be ‘experienced’ better when it is clear that risk controls are brought to bear on the range of possible outcomes
- Quantification is highly valued, both to define the goal and to define at any stage the goal-specific outcomes the portfolio will produce
Example: a 'drawdown plan'
- Goal: to meet all lifetime spending needs from a defined amount of resources (from income and capital, from pension or taxable capital or both)
- Defined targets: a safely-sustainable annual rate of draw in real £s, including both a desired outcome and a tolerable worst-case outcome
- Defined time horizons: a schedule of dates based on age
- Defined resources: capital assigned (or required) to meet outcomes
- Defined risk tolerance: as a function of tolerable ranges of outcome, reflecting how upside potential is traded off against downside risk
Collaborative planning means the plan is defined with an internally-consistent balance between the targets, time, risk and resources.
The investment portfolio is managed dynamically to ensure that whatever happens in markets, the agreed range of outcomes can still be delivered as required, when required:
- The portfolio building blocks that provide sufficient predictability are major equity markets, globally diversified; but to control the range of outcomes we need to combine these risky assets with risk free assets with near-certain real outcomes (usually index linked gilts)
- The dynamic ‘asset allocation’ process that controls the portfolio is based on a mathematical model
- Implementation relies on low-cost equity index-tracking funds and cash or index linked gilts
Progress of the portfolio is reported (quarterly) looking forward:
- The model recalculates the new probabilities of achieving the target outcomes
- Because the model assumes slow mean reversion in real equity returns the probabilities are much more stable than markets
- This ensures messages about the adequacy of resources and the sustainability of the rate of draw from a portfolio do not keep changing
Past performance is also reported looking backwards, referencing index returns for assets that represent the market environment in the period. Because all portfolios are different, and because the main source of returns is likely to be the ‘policy’ decisions made by clients in the planning process either to hedge or expose capital to different risks, we do not use past performance as a marketing tool for the firm’s services. An example of how we sometimes use sample real portfolios to illustrate the sources of returns or the asset allocations changes made in response to market movements can be read here.
Complementary investments
We can advise on the typical complementary investments clients come with and wish to retain, including integrating these into a framework of family financial goals and a structure of total balance sheet risks. We can also arrange investments in complementary areas to provide new exposures sought by clients.
We characterise as complementary the following types of investment:
- Entrepreneurial holdings (such as early stage investing, illiquid private partnerships, direct property holdings)
- Undiversified individual equity holdings (such as through employment or family businesses)
- Managed exposures to highly-diversified alternative asset classes and strategies including co-investing with several Oxford college endowment funds
- Selective exposures to individual asset classes or strategies (such as commodities)
- Tax-favoured entrepreneurial investments (where the investment would not be made were the risks not effectively shared with HMRC)
