Asset Allocation & How We Choose Investment Funds

After we have established the right pension or investment company and product for you or if it is a product/policy you already have, we then look more deeply at the funds available.

Risk Profile

We establish your basic risk profile e.g.  low risk, low to medium risk, medium risk, medium to high risk and high risk based upon some generic descriptions of each risk level.

Tolerance to Loss

We will work out with you what your tolerance to short term losses are.  E.g.  Medium risk:  Could you cope with 1 year loss of 20%?  Do you have enough capital elsewhere so that you would not be under duress or need to cash in other investments at the wrong time or after markets have fallen that have been ‘earmarked’ for other medium and longer term objectives.

This will likely be short term tolerance to losses e.g.  with 6 to 12 month trading ranges of +/-5%, +/10%, +/-15%, +/-20% etc.  We will also establish your experience, requirements or views on markets, economy, green, environmental and socially responsible investing.

Fund Research and Selection

This usually can take 4-6 hours for each policy/plan.  We back test all investment fund performance of each fund over different periods.  Usually 1,3 and 5 years as well as different 1, 3 and 5 year period combinations.  We are search for above average, consistent performance only.

The Funds

• We do not chase ‘star’ or celebrity fund managers, as things can go wrong as well as right.
• We are interested in the rules, parameters and the governance of the fund rather than the fund manager. 
• It is the analysts that ‘stock pick’ after all, not the fund manager who steers the fund.
• We look at the make up of each fund to check its weighting in certain sectors e.g.  UK, US, Europe or indeed within sectors e.g.  Technology, Health, Banking, Mining.
• We then check its widest volatility trading range over 1 year periods in the last 5 years.  This could be +/-5%, +/10%, +/-15%, +/-20%, +/-30%, +/-50% etc.

Asset Allocation

Now that we have our shortlist of funds based upon consistent performance, make up, sector weighting and maximum trading range volatility, we then proceed to build a balanced portfolio based upon economic indicators for the coming year e.g.:

• Interest rate forecasts
• Inflation forecasts
• Economic activity
• Politics
• Taxation changes
• Demographic changes
• External influencers
• Other market commentators and fund house sentiment to each sector.

Funds are allocated based upon the above criteria and weighted volatility e.g.  a preferred Bond fund may have +-5%pa volatility, UK Index Linked Gilt fund +/-10%pa and a preferred US stock market fund may have +/-30%pa volatility, so we balance the amounts in these funds along with others to achieve what your overall risk profile is and tolerance to losses.

Do we get it right all of the time?

No one can ‘call the market’ and we are not trying to and there are always ‘shock’ market events that create ups and downs in markets.  Our methodology is to find the balance of funds in the right sectors for the coming years that will deliver you consistently above average performance year on year and to ride out any short term corrections or crashes.

Why the short term ‘above average’ target? Kaizen …

The principal of Kaizen is a Japanese business philosophy that small daily improvements present huge medium and long term commercial advantage and efficiency.  We have adapted the Kaizen philosophy to your investment funds by targeting small daily improvements or above average performance in the short term to deliver target investment growth returns and more (we hope) in the medium and longer term.

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