The information on this page is not a substitute for personal independent financial advice, and should not be relied upon or construed as advice.  Your investment approach will be dependant on your personal circumstances and we recommend you seek independent financial advice before embarking on a course of action.

Our Investment Philosophy.

Invest for the longer term - we believe you should be an investor rather than a speculator.

Diversify to reduce risk – use different asset classes

Use passive investment wherever possible – For the reasons set out later we believe that passive investment offers better prospects for most investors than active management.

Use institutional asset class funds (where possible) with low costs which deliver better returns than similar funds with higher charges

Rebalance on a regular basis to retain a disciplined approach and a consistent risk profile

These points and the reasons behind them are expanded upon in this guide, which also explains the benefits of Rutherford Wilkinson’s Professional Financial Planning Service.

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Asset Classes

The type of assets in which you invest will be the greatest influence on your final returns, how risky your investment behaves, and ultimately, whether you achieve your objectives.

There are four basic asset classes which are as follows:

Cash: This is money which is held on deposit, where interest is paid and the nominal value of the capital is very secure, but there is no prospect for growth in the value of the capital.

Fixed Interest Securities:These are effectively loans. They pay interest at a fixed rate and return the loan capital at a fixed date in the future (the redemption date).

Gilts are loans to the Government.

Corporate bonds are loans to companies, and therefore carry a risk of default, which is rewarded by higher interest, related to the strength of the company.

Another type of bond which can offer diversity and protection against inflation is an index-linked bond, which are usually only issued by governments and offer protection against inflation in both the interest they pay and the capital return.

Property: In investment terms this usually refers to commercial property, eg retail (shops), office, industrial etc.

Residential property tends to be more volatile than commercial property, and the risk of a break between tenants can be higher. Since a substantial part of most investors’ wealth is often tied up in the home in which they live, it is usually better to consider commercial property investments

Equities:These are shares in the ownership of companies, and entitlement to the future profits of those companies.

As an investment equities can be broken down further into shares in different countries, sectors (eg: telecommunications, banks, construction, leisure etc), size of company and varying growth prospects.

Different types of share will prosper in different economic conditions.

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Risk vs Return

The table below shows how the four main asset classes have performed, in percentage terms, over the last nine years. It can be seen that the three years 2000, 2001 and 2002 were particularly hard on equities, but better for property and bonds.

Risk vs Return Chart

Source of information: Financial Express – (UK Shares=Legal & General UK Tracker, Property =NU Property Unit Trust, Bonds=Legal & General All Gilt, Cash=Legal & General Cash fund)

The different asset classes behave differently at different times, and it is impossible to predict consistently which area is next year’s best performer. Diversification means spreading your investment across different sectors and asset classes, to reduce market risk.

The key to successful investment is to create a balanced portfolio across a range of asset classes. This protects you from short term losses in one part of your portfolio, through exposure to stronger performance elsewhere. Through this diversification, risk is reduced.

Past performance is not a guide to future performance

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Emergency and short term funds

If you need funds within the next few years, or may do so in the event of an emergency, then it is not appropriate to invest this money in assets such as property or shares. We therefore recommend that such funds are set aside in cash before committing funds to assets, such as property or shares, which are more appropriate for longer term investment.

Why we recommend passive fund management where possible

In the past, we have used actively managed funds to try to achieve the best returns for our clients. This means that a fund manager will invest, in a particular sector, aiming to beat the other managers in that sector. He or she will try to identify those stocks which will perform better than others, or try to find the needle in the haystack.

Passively invested funds simply seek to provide the market return. They buy the haystack.

Looking at past performance tables comparing different funds, it may appear that many active fund managers have the edge over passive funds, and looking backwards, it is undeniable that some managers have demonstrated skill and judgement to generate well above average returns for their clients, in the past.

However, active funds have a number of fundamental drawbacks for investors, looking to the future.

  • Statistically, two thirds of active managers under perform the markets that they are investing in each year. Furthermore, it is not possible to predict which one third of active managers are beating the market as the out-performers are a shifting population (source: Smarter Investing – author Tim Hale).
  • Originally, the reason to employ a fund manager to look after your investments on an active basis was that there were so many different shares available it was impossible to select the winners of the future. Now, we have reached a situation where there are more active managers and funds than there are actual shares so we are back at stage one again.
  • Active managers also have a tendency to trade the stocks in their portfolios in their efforts to beat the markets. Each time a stock is purchased there is a cost and each time a stock is sold there is another cost. This turnover can have a significant effect on the total expenses of the fund over time.
  • For every manager selling a share, another one is buying it. One will have made the correct decision for the future, the other will not, but both will have incurred the trading costs.
  • Within the fund management industry there is a continual ‘merry go round’ of fund managers, meaning that they rarely stay with the same company for more than two or three years. This has had a dramatic effect on the way we are able to manage money. The charges involved in moving a client's portfolio from one fund to another involves considerable costs against leaving the funds to be at the mercy of a manager we may be unfamiliar with.

Overall these factors have substantially increased the risk of investing in active managers and we have found that this higher level of risk is not reflected in any significant greater returns for our clients. In short, there is no reliable way of identifying which fund managers are going to get it right in the future, and even if we did find such a manager, the chances are he or she would have moved on before we were able to benefit.

By using passive investment funds we therefore have the following advantages:

  • As passive funds operate a buy and hold strategy, trading costs are reduced substantially.
  • Fund management charges are reduced, as there is no star fund manager to pay
  • Reduced transaction costs, as no need to review funds when managers move

A balance between Index tracking and the 'Dimensional' approach

The vast majority of passive management is centred round the tracking of various indices. This may present a number of investment problems as follows:

  • The weighting of funds towards the larger constituents in the index. For example, the top 10 companies in the UK market constitute around 50% of the FTSE 100 index and 40% of the FTSE all share index.
  • Index-tracking funds must buy and sell companies as they enter and leave the index, usually all at the same time, and quite possibly the wrong time.
  • In markets, including smaller companies, the necessity to purchase potentially illiquid stocks

Unchecked, the potential problems above could lead to reduced returns from your portfolio. We therefore supplement standard all-share index tracking funds with passive funds from Dimensional Fund Advisers.

Dimensional Fund Advisers adopts a scientific and pragmatic approach managing funds in a disciplined and structured way to enable investors to enjoy the benefits of passive investment but with sufficient pragmatism to avoid large company bias and rigid trading parameters. Dimensional funds are available only via fee-based financial advisers. They do not pay introductory commissions, standing or falling only on their ability to manage their funds.

Academic research by Professors Fama and French studied the returns achieved by 'growth' and 'value' types of shares, and the shares of larger and smaller companies. These returns were studied over many time periods and many decades of data were used. The research showed that, whilst there will be periods of time when growth and large companies outperform, these periods are in the minority. Over most time periods, and importantly when shares are held for the longer term, smaller and value shares reward investors with higher returns than large and growth shares.

Whilst the Dimensional funds invest in all areas of the market, there is a bias towards smaller and value shares compared with the market as a whole.

There will therefore be periods of time when the funds under-perform the market as a whole, but over the longer term the lower charges and the slight bias to smaller and value style companies should provide a greater likelihood of higher long term returns.

Fixed Interest Investment

Within fixed interest investment, we have identified that based on the evidence of past returns, the additional risk involved in investing in corporate bonds rather than gilts is not rewarded by sufficient additional returns, over the longer term. Our fixed interest investment is therefore restricted to short dated bonds and index-linked gilts. This evidence is supported by Dimensional's own research.

Property

The reason for including property in the portfolio is to reduce volatility, by providing a part of the portfolio which may perform well when other areas such as equities and fixed interest might be underperforming.

Property is an area where passive investment is less possible, as the desirable aspects of commercial property investment are only available from investment directly in bricks and mortar.

The desirable factors required from a property fund are as follows:

  • Low volatility
  • Large fund size – for increased diversification
  • Low charges
  • Low cash holdings
  • Holdings in 'bricks & mortar' preferred, due to lower volatility
  • Historic relative performance

Where our portfolios invest in property, we use two funds, for diversification purposes. Both funds are selected with the above objectives.

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Asset Allocation - Our Model Portfolios

We have designed six portfolios, each with a different balance between risk and potential reward. These are as follows:

Asset Allocation Chart

The funds used for each portfolio are the same, but the proportions used differ according to the exposure required to each asset class.

A key part of our advice process is the completion of a detailed risk profiling questionnaire which we will use to establish which of the above portfolios is most suitable for you as an investor.

The Finametrica Risk Profiling system is a sophisticated tool helping us to determine clearly where your boundaries lie in terms of what level of volatility you are prepared to accept.

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The Importance of Rebalancing

A key part of our Professional Financial Planning service is rebalancing the portfolio at a regular review.

This introduces a discipline to the investment process which saves the investor from two potential pitfalls, which tend to occur when rebalancing doesn’t take place, namely:

  1. The risk profile of the portfolio drifts over time
  2. Most people tend to buy when markets are rising, and sell when they are falling

To demonstrate these points, let us consider examples of the effects of differing returns over two different time periods.

Risk Profile Drift – 2003 to 2007

Firstly assume a portfolio is invested at the beginning of 2003, with a 50:50 split between equities and fixed interest investments. Assuming market returns, the balance would have altered as below by 2007:

Risk Profile Drift Chart

The balance of the portfolio after a few years has a significantly higher risk profile. During 2008, equities were severely affected by the “credit crunch”, meaning that the over-exposure of the portfolio to equities would have meant the additional risk adopted was punished.

Rebalancing each year ensures that as markets rise, profits are consolidated into other assets, keeping the risk profile of the portfolio as intended.

Buy Low, Sell High - 2002 to 2003

Where rebalancing becomes an even more important discipline is where assets have fallen in value. If our investment had been made at the beginning of 2002, it would have drifted as follows, as equities fell by 23% during that year:

Buy Low, Sell High Chart

Successful investment is summed up in a simple phrase: Buy low – Sell high. Whilst this adage may be easy to say, the majority of investors in practice actually do exactly the opposite. When stock-markets are rising, or have risen, people are drawn to invest, ignoring the risks which seem worthwhile when things are going up.

However, when markets fall, which they inevitably will from time to time, investors tend to become fearful and either sell or stay away from equities, at exactly the time when they should be buying.

By rebalancing at the end of 2002, we are 'buying low', and allowing more of the fund to benefit from the bounce in equities when they recover, thereby participating in the rise in the market. Equities rose 20% in 2003.

Rebalancing on a regular basis, preferably annually, therefore:

  1. Maintains the risk profile of the portfolio
  2. Introduces a 'buy-low, sell-high' discipline to the investment

The Professional Financial Planning Service is an ongoing commitment on our behalf to revisit your investments on a regular basis and, if necessary, rebalance your portfolio in accordance with your risk profile.

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Professional Financial Planning Service

Rutherford Wilkinson offers you the Professional Planning Service, which puts into practice the investment philosophy set out in this document.

This includes the following:

  • A Minimum Of One Annual Face To Face Meeting (If Appropriate)
  • The RWLtd 12 Point Financial Health Check For Protection & Investment
  • Re-Balancing of Asset Allocation at agreed intervals
  • Monitoring And Evaluation Of Original Investment Funds
  • Biannual Written Portfolio Valuations
  • Annual Written Tax Summary Where relevant
  • Online Access To 'Wrap Platform' Where Appropriate
  • Review Of Other Investment Opportunities Upon Request
  • Remove the Hassle Service
  • Review Your Documents To Minimise Paperwork Wherever Possible.
  • Priority Response & Availability
  • Additional Face To Face Meetings Available On Request
  • Unlimited Access To Your Adviser During Normal Business Hours Via Telephone Or Email - We aim to return all phone calls and emails within one working day.

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The information on this page is intended to set out the principles by which Rutherford Wilkinson’s advisors will construct investment recommendations for our clients.

Its purpose is to set out the philosophy we adopt and the process we follow in designing a portfolio, and to give you factual information relating to the investments we recommend.

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