One of the most important findings to arise from Modern Portfolio Theory is that investors should avoid concentrated sources of risk, by holding a diversified portfolio.

We know that the behaviour and volatility of different assets (such as equities and bonds) are not perfectly positively correlated, so their values may move independently from each other.

For example, the behaviour of a higher risk equity fund will differ to that of a bond fund in how it reacts to varying economic events. We see see that during a recession, equities usually fall in value, but bonds often rise.

Academic evidence shows that if you combine assets that behave differently, the collective investment will have a lower level of risk than if the money was held in a single type of asset.

Similarly, investments that are of the same asset type (such as equities) but in different sectors (such as pharmaceuticals or energy production) or in different geographical areas (such as the UK or North America) will not all behave in the same way. Having a spread across asset types, sectors and geographical areas all helps to spread investor risk.

This means a diversified portfolio should be less volatile and more effective than one made up exclusively of one type of asset.

Our position: We diversify portfolios by asset class, sector and geography. Our portfolios focus on the two main asset classes: equities and bonds. We use funds that track investment markets, meaning that we invest in all companies that appear in the market index we are using which gives exposure to all sectors. We also use funds that provide global exposure, with no bias towards the UK.

Numerous studies prove that the vast majority of the behaviour of an investment portfolio is due to its asset allocation. In other words, the spread between different types of assets (such as equities and bonds) had most impact on returns, rather than individual investments in specific companies. These studies emphasise the importance of asset allocation, and go so far as to suggest the default investment route should be to ascertain an investor’s risk profile, create the optimum mix of assets with that in mind, and hold the position until their circumstances change. This is called a strategic asset allocation approach, or ‘buy and hold’. It can be compared against the tactical asset allocation approach, where investment managers make frequent changes to the allocation, in the hope of making improved gains.

Our portfolios use the main asset classes including:

·        UK Gilts

·        Sterling Corporate Bonds

·        Global Bonds

·        Emerging Market Debt

·        UK Equities

·        European Equities

·        US Equities

·        Japan Equities

·        Asia Pacific Equities

·        Emerging Market Equities

·        Global Equities

Alternative asset classes are excluded from the process, which includes Absolute Return funds, Commodities, Hedge Funds, Private Equity, Venture Capital and others. These are not expected to be necessary components of a typical investor’s portfolio and there is rarely reason to create complexity for larger portfolios simply because of their value. We will only consider exposure to these alternative asset classes should we feel they are required.

Our position: We use a strategic asset allocation approach in our portfolios.

Traditionally most investment portfolios, including many still available today have tended to have a home bias. They have more weighting towards the investors’ own country, usually because it feels more comfortable and familiar. However, evidence has long shown that this is to the detriment of investors as it introduces regional and sectoral bias and limits diversification.

The most effective investment approach would be to invest across all global markets. However, it is not possible or effective to invest in every single country of the world because some do not have robust regulated investment trading markets and others do not allow outside investors, for example. When we say ‘global investing’ what we mean is ‘global investing so far as possible given the constraints that exist’.

Our approach: We invest in portfolios that provide global diversification, ideally with no home bias at all.

Passive investing is a style of investment management where a fund's performance aims to mirror a market index. Passive management works in conjunction with Modern Portfolio Theory and the Efficient Market Hypothesis, which renders individual stock picking or tactical asset allocation futile.

Evidence suggests it is pointless in a long-term portfolio to search for undervalued stocks or to try to predict trends in the market through either fundamental or technical analysis. We know that if active fund managers adopting this approach perform well, this can be proven to be a matter as much of luck as it could be of skill. If they were able to successfully exploit inefficiencies in the market they would achieve higher returns consistently over time, which they do not.

A wide range of funds now exist that are designed to track investment market indices. Their success can be measured in part by how faithfully they do so. These funds tend to be low cost and simple by design, which helps how effective they are.

In order to decide which passive, index tracking funds to use, we first need to select the market indices that represent the asset allocation we are looking for. We use mainstream broad market indices that capture the a large number of holdings, providing a representative sample of their region, market cap size weighting, and sectors. This is in order to benefit from efficiencies.

For equities we start by obtaining data from either the MSCI World index or FTSE Global Equity All Cap index (Market Cap Weighted) Data. Both of these are the largest global equity indexes. The MSCI World index captures 85% of the investable universe by market cap and excludes the bottom 15% as small-cap firms. The FTSE global index captures 90% of the investable universe and excludes the bottom 10% as small-cap, and so contains more smaller companies.

To diversify the global allocation further, so as not to invest the entire global allocation in one single fund, we extract the following regions from the global market with their corresponding index:

• US total market

• UK total market

• Developed Europe ex UK

• Emerging markets

• Japan

• Pacific ex Japan

However, it is not always possible or appropriate to invest passively. In certain markets there are limited passive fund options at present (such as socially responsible bond exposure). For some investors, there may be a strong desire to take a different active approach, for socially responsible reasons, pure interest or investment conviction. We don’t assume that passive investment is suitable for all of our clients.

Our approach: We adopt a passive investment approach for our investment portfolio range. We regularly review the market to ensure that this strategy remains optimal.

There is a growing demand from investors for transparency about their investment portfolios, and in particular to have that money reflect their own personal values. At the same time, there’s an increasing desire to use invested money responsibly in a way that could make a difference to the world.

We offer a portfolio range that takes responsibility factors into account.

For our Good Practice portfolios we start with the same principles outlined on this page, then apply additional filters and tilts towards companies with good practice:

• Excluding those companies assessed to have poor practice in the areas of Environmental sustainability, Social responsibility and good Governance.

• Tilting towards those companies with the best practice in those same areas of Environmental sustainability, Social responsibility and good Governance.

• Excluding companies providing goods and services that are generally considered to be harmful to the environment and/or people.

For both the equity and bond exposure, we select funds that track a range of global indices which apply the filters and tilts required.

Our aim is to closely align our Good Practice portfolios with our Core range.

For that reason, companies that might be deemed to have poor practices in any area may not be completely excluded, but we would expect there to be a reduced holding in them.

Some fund managers take the view that by excluding a company from their portfolio, it removes ‘a voice at the table’ to effect positive change, and that positive engagement could be beneficial in the long term.

Our approach: Start with the same sound principles and apply filters and tilts to focus more on companies with good practice so clients can invest in closer alignment to their values.

As a fully independent financial advice company, we consider all investment vehicles available to our clients. However, for the purpose of our portfolios, we use high-quality index-tracking regulated investment funds where possible. We also use Exchange Traded Funds where appropriate.

We have a robust, data-based, quantitative due diligence process which allows us to select the appropriate underlying investments for the portfolios.

We do not envisage using property, commodity, absolute return or other thematic funds due to counterparty risk, possible valuation issues, additional trading costs for clients when buying/selling, and liquidity risks.

Our approach: Use simple, established and regulated investment funds in our portfolios.

An investor’s tolerance of investment risk is measured using proven psychometric profiling, which provides a risk tolerance score. We map that score against investment portfolio risk levels.

Overlaid are documented discussions with our client about risk and an awareness of the context of the investment, its purpose and time frame.

We also carry out an assessment using cash flow modelling of our client’s ‘need’ to take investment risk and their capacity for losses. We do this by modelling different growth rates, variability of returns, and market crash scenarios.

Our approach: We are methodical and careful to make sure our clients take only the risk that is tolerable and necessary.

At the outset, we agree when regular reviews will take place and what they will involve. All portfolios are reviewed at least annually.

Performance will be considered on a monetary and percentage. All investments will be benchmarked against the appropriate index benchmark and where appropriate CPI inflation, sector average, or another more suitable benchmark.

Our approach: Investment monitoring allows us to make sure the risk level remains appropriate and changes where necessary, including rebalancing, can lead to improved performance. Monitoring performance against a consistent risk-adjusted benchmark allows us to demonstrate returns in context.

Rebalancing ensures your asset allocation, and therefore, risk level and portfolio parameters remain as agreed.

Because we can expect the distribution between the different funds in the portfolio to drift over time, returning them to the ideal allocation optimises your portfolio and gives you a better chance of success. Crucially, this also ensures you are not inadvertently taking more risk than is appropriate.

Our portfolios are automatically rebalanced based on 10% thresholds per individual fund.

We will obtain consent to rebalance where there may be tax implications such as investments held in a general investment account.

We do not change any funds. Any future changes to funds will be carried out separately to the rebalance exercise and in this case client consent will be obtained.

Our approach: Keep portfolios rebalanced regularly to optimise returns and use capital gains tax allowances where appropriate. Keep things simple by requesting consent to do so automatically without having to obtain investor approval each time.

When providing any sort of financial planning advice, we pay particular attention to our client’s circumstances that could result in them being, or becoming, vulnerable to making poor financial decisions.

This assessment takes place with every interaction and, if we are concerned about a client’s potential vulnerability, we will put in place extra measures to protect them. These might be explicitly agreed, or decided by the financial planner alone.

Being vulnerable to making poor financial decisions could stem from any of the following, and more:

• Physical disabilities such as being hard of hearing or sight impaired.

• Mental frailty due to advanced age, learning disabilities, ADHD, dementia, PSTD and more.

• Emotional sensitivity due to a change of circumstances including bereavement, redundancy, retirement, divorce and more.

• Financial stress due to receiving a large windfall, including an inheritance, lottery win or business sale proceeds and more.

There is a risk of making poor financial decisions even with professional advice, if vulnerabilities are not identified clearly and addressed. There is also an increased risk of being susceptible to scams or being taken advantage of.

Our approach: We consider our clients’ ability to make sound decisions with each communication. Where we have any concerns about vulnerability, we will take appropriate action, which could range from having larger print documents, having a family member present, capping conversations to an agreed time limit to prevent overwhelm, or simply deferring key decisions for a few days, weeks or months.

Where our clients feel that they are not prepared to profit from the activities of companies that don’t match their values, we will apply different criteria to best meet their needs. Our first step will be to apply responsible investing criteria to see whether a ‘model’ portfolio will meet those needs. If that is not adequate, we will construct a bespoke portfolio, while keeping to our investment philosophy so far as that is possible.