Prior to the financial crisis in 2007/9, we outsourced investment recommendations to external discretionary portfolio managers. The thinking was that these firms were populated by vast armies of economists, researchers and analysts and would deliver a better investment experience to our clients than we could.
This left us to focus on planning, strategy, tax management, client communication and behavioural consulting. It seemed like a sensible division of labour.
The reality, when the crisis hit was that the investment experts couldn’t protect our clients from the worst of the market collapse and the subsequent bear market – despite the huge resources they had at their fingertips. All our client portfolios followed the markets down with each gut-wrenching twist and turn of the apparent collapse of the global banking system.
After markets recovered in 2009, I reflected on our experience and how, despite paying a premium to access the wisdom and resources at the portfolio management companies, they did not appear to reward us or our clients.
I just knew there had to be a better way but wasn’t sure what precisely it was. And so, in a spirit of curiosity, we began a journey of discovery that was to last 18 months.
I hired an external investment advisory firm, Albion Consulting and together with my senior colleagues, spent months building our own in-house investment philosophy, structure and over time, our own portfolios.
Investment is a bit like politics or sport – everyone’s got an opinion and thinks their way is the only way. Therefore, we insisted on a basic rule – any ideas or recommendations had to be evidence-based. We searched for rigorous, empirical data that would support any view we wanted to consider and unless there was a body of academic research to support the view, we ignored it.
- Are markets efficient?
- Should we allocate to gold or other commodities?
- What about alternatives, hedge funds, private equity?
- What really works?
Once we documented the philosophy and framework into a 300 page ‘Investment Bible’ we began the arduous task of sifting through all the available retail funds to sort the wheat from the chaff. Incredibly there are over 600,000 separate funds available to investors and over time, we painstakingly managed to narrow them down to about 20.
We launched in February 2011 and named the range of internally managed model portfolios, Intelligent Investing. And we’ve managed our client money (and our own) that way ever since then. So now we have over 10 years of real-life data to compare ourselves with the best of the investment brains out there in the market.
The numbers are clear, and we compare very well. Using the independent performance rating company, Asset Risk Consultants’ composite benchmark of 85 leading Discretionary Portfolio Managers, on a like for like basis, we have generated consistent outperformance year after year since launch in 2011.
So, how can a boutique firm of wealth planners with no in-house economists, data scientists or PhDs beat the sharpest minds in finance over such a continuous period?
Here’s the secret – it’s not because we’re smarter than our competition. It’s simply because we avoid doing things that we believe (and the research confirms) are dumb!
This includes making short term forecasts, guessing the future direction of currencies, commodity prices and inflation rates – and then trading your way in and out of positions all day in the hope of getting lucky.
We do the basics and do them well. We diversify across thousands of underlying securities (12,000 at last count), we avoid investing in assets that are unproven and we keep costs exceptionally low.
The proof is in the pudding, the performance data is there to be seen, and we now look forward to the next 10 years of outperforming the investment giants.
Let me know if you want to learn more.