A partnership that can pay dividends
July 2009
Investment managers around the world have
been, and still are, faced with some of the most challenging
capital market conditions seen during their working lives. For the
majority, one message has been made abundantly clear - managing
assets for clients and consistently delivering benchmark, or
better, returns is a very difficult task. As a private investor, to
manage your own assets is an even greater challenge. Typically, you
may not have the time to devote to your investments and cannot
monitor the progress of your portfolio consistently nor
pro-actively respond to the fast-changing events we have seen in
recent times. Or you may have particular investment objectives you
require help to achieve such as generating income or managing
pension assets to meet your future financial needs in
retirement.
It is understandable that more and more
people are now choosing to delegate the day-to-day management and
administration of their investments to someone with more experience
and time. As a result of the market downturn impacting on
investment portfolios, more and more potential investors are now
looking for a qualified investment professional who will work
closely with them to tailor an appropriate investment portfolio,
and then manage it for them. This approach is known in the industry
as a discretionary investment management service or, as we like to
call it, a wealth management service. To put it simply, you
delegate to the investment manager the authority, or the
discretion, to make day-to-day investment decisions on your behalf,
without obtaining prior approval ahead of each trade. At Fairbairn
Private Bank we take this duty of care very seriously and manage
all of our clients’ assets in line with our three fundamental
investment principles:
- Asset allocation is the key driver of investment
performance
- Multi–asset class investing diversifies risk and maximises the
opportunities to deliver attractive risk adjusted returns
- Passive or index tracking funds will commonly out perform
actively managed funds in developed markets.
We consider this investment philosophy and
investment process to be well placed to manage assets in the
current environment. And we really do practice what we
preach. Our wealth management service embraces the principles of
asset allocation, thus diversifying risk by spreading investments
across different themes and markets and optimising returns through
tactical asset allocation. While we can never remove the
possibility of short periods of negative returns in certain market
conditions, over time our three principles have proven to create an
ideal methodology for optimising investment return for given levels
of investor risk.
As ever, the key to successful investment
performance is managing the delicate balance between risk and
return. Therefore it is essential for us, as wealth managers, to
ascertain your attitude to risk before building an investment
solution. Our ‘core and explore’ investment strategy offers an
extremely flexible framework for constructing your investment
portfolio. Your core investment is allocated across all the major
markets and asset classes, being: cash, bonds, commercial property,
equities and alternative investments. The ‘explore’ element of your
portfolio allows you to do exactly that: explore. By introducing
satellite investments to your core, you can gain access to specific
investment themes with the aim of maximising risk-adjusted returns.
The ‘core and explore’ approach fosters an environment in which we
can work closely together to define investment goals and share
strategy development.
With interest rates at an all time low around
the world, and with the outlook that this environment will prevail
for some time to come, the quest to achieve investment returns
ahead of cash is at the forefront of many investors’ minds. Our
wealth management service is designed to offer the opportunity to
capture enhanced returns above cash, with the target level of
return dictated by the level of risk you are prepared to take. As
an example, if you had a low risk outlook, and want to target a
higher yield from your cash-based assets, then our bond portfolio
might be suitable for you. The portfolio has been established for
investors who have previously been reliant on cash returns and are
now looking to increase investment income whilst taking minimal
risk. It aims to deliver returns in excess of cash within a
standard deviation* range of 3% to 7%. At the other end of the risk
spectrum, our higher risk strategy aims to deliver a return of 4%
over cash within a standard deviation range of 14% or more.
The fees for our core and explore based
wealth management service range from 0.65% to 0.95% per annum,
depending on the value of the portfolio, whilst our bond portfolio
fees are 0.5% of the portfolio value. We believe these fees are
excellent value for money and we are committed to controlling costs
within portfolios to ensure overall returns are not impaired by
unnecessary expenses. The use of passive or index tracking funds is
one of our core principles and their use allows us to capture
‘market returns’ at considerably lower costs than those incurred by
using actively managed funds.
To help emphasise the importance of asset
allocation and the limitations of active management, academic
research has demonstrated that asset allocation, in contrast to
active management (or effective market timing), is the main
determinant of investment return**. This explains the steadily
rising popularity of using index tracking funds to facilitate
effective asset allocation – our preferred wealth management
style.
If our wealth management service appeals to
you, and you have a minimum of £100,000 to invest, please call us
on +44 (0) 1624 645000.
The value of investments and the income from
them can fall as well as rise and you may not get back the original
amount invested. The use of structured products within our
portfolios results in investors being exposed to counterparty risk.
This means investors are exposed to the creditworthiness of the
counterparty bank which may vary over the term of the portfolio. If
the counterparty bank defaults on the structured product, investors
may lose their investment, although we will only structure such
products through banks with a minimum "A" credit rating. Exchange
rate changes may affect the value of investments.
* Standard deviation is a measure of how
widely "spread out" the returns of an investment are. The more
spread out the returns are, the bigger and more frequent the losses
on that investment. An investment's return over a year will be
within one standard deviation of its expected return roughly
two-thirds of the time, and within two standard deviations roughly
95% of the time. So, for example, if an investment has an expected
return of 6%, with a standard deviation of 2%, then its return
should be between 4% and 8% two-thirds of the time; and between 2%
and 10%, 95% of the time.
** Brinson, Beebower and Singer
Financial Analyst Journal June 1991; Ibbotson & Kaplan
AIMR 2000