Committee’s Note

A note from the Investment Committee (“IC”) Chairman

Firstly, I’d like to thank you all for your questions and engagement with Question the Committee 2018. The Committee have enjoyed the variety of questions received, varying from comments on global financial markets and key political events, to specific questions around short-term returns. Special thanks to the winner – their question’s simplicity and relevance ultimately led to our decision to award them best question. Once again, I would like to take the opportunity to thank you for your ongoing support and I hope that you find the following blog thought provoking.

Ashley Brooks
Investment Committee Chairman

Winning Question

“On a scale of 1 to 10 (1=the world is ending and 10=amazing opportunity), how positive are you feeling about the markets over the next 12 months?”

Four. To briefly expand, overall there are fewer opportunities at this phase of the cycle and as we have said in quite a few recent blogs, this is a period for “capital preservation” and not “capital growth”.

However, we also have certain convictions which we believe offer great potential. For one, Japanese equities look attractive on the back of an improving corporate environment in Japan. Further, it is clear that the majority of investors are very negative on the UK, and whilst we don’t think the economy will be buoyant, we do think it will be solid, so there is an opportunity here. Even in the asset classes where our outlook is negative, such as fixed interest, we have found some great fund ideas which we think can add value.

“Why have I had a lower return in the last 12 months than I have in the past?”

It is always important to retain perspective when reviewing investment performance. Any 12-month period in isolation is very short-term, and it will always be the case that over the course of an investment cycle there will be periods where performance fluctuates. The lower the risk level chosen, the lower the levels of fluctuation are likely to be.

Over the last 5 and 10 years, our portfolios have hit our return objectives. So at present we are sitting on the back of a good ten-year period for performance. Our Low to Medium Risk Portfolio for example has returned over 68% net of costs in the last 10 years; above the upper end of our 4%-6% per annum return target. Those figures include a more challenging last 12 months, where to your point, lower returns have been generated.

The big driver of such strong market performance over the last 10 years, namely supportive policy by Central Banks, changed in late 2017. Policymakers are now keen to raise interest rates and restrict the growth of money, both of which negatively affect markets. The last 12 months have therefore been the first part of a period of “normalisation”, where conditions slowly return to a more neutral position. This does not mean that there aren’t opportunities, it just means that at the market level, returns are likely to be lower in the short-term. Over the last 6 months, our Low to Medium portfolio has returned 2% net of costs, so we are starting to see the benefit of some of our recent changes.

“What will be the impact on financial markets, and for how long will it last, if we have a hard Brexit?”

Of all the Brexit outcomes, this would certainly create the most uncertainty. However, as we saw post Brexit vote, we would expect the pound to take the majority of the pain. Consequently, overseas equities would be buoyed, creating a strong positive factor for portfolio performance.

There is no doubt that other assets would be hurt – domestic UK stocks and UK Commercial Property would probably fair the worst – but overall, we would not expect it to be a bad outcome for the portfolios.

As is the nature of markets, the news would be quickly absorbed. The initial reaction would be volatile, and then we would expect a sustained period where the UK market performs worse than its overseas counterparts, as the UK economy slows on the back of trade-based concerns.

We do not want to place a bet on any one of the possible outcomes and are instead focussed on ensuring the portfolios are positioned well irrespective. We therefore feel very confident that whatever happens, your money will be working hard for you.

“When you say “there are years where capital preservation is more important” what do you mean?”

Across every cycle (say, 5 to 10-year period), there are years where opportunities are great and you get rewarded for taking risk (2009, 2010 and 2014 are all good examples of this), and there are years where risks are too high and potential returns much lower (e.g. 2011, 2015 and 2018).

In a tennis rally, every shot you have is a choice to attack or defend. Better players know when to respect the fact that their opponent has hit a great shot, and just do all they can to get the ball back.  In contrast, when they get a nice easy short ball they are aggressive and attack it.

In a similar way, one of our roles is to adapt our investment style to the environment that is facing us, and at the moment the markets are playing quite a few good shots. Our focus is therefore to protect your capital, whilst focussing our expertise to uncover those niche opportunities that can add value.

“When should one consider a “high risk” investment as opposed to “medium risk”?”

This is an appropriate question at the moment, because as time passes and returns reduce in lower risk assets, more and more people get attracted to higher headline returns. The problem with this is that higher returns generally means taking much more risk. As Warren Buffet (arguably the greatest ever investor) famously said “be greedy when others are fearful, and fearful when others are greedy”. The optimal point to take more risk is when markets have reduced in value. Importantly, this is the opposite of where we are right now and unfortunately, we see a lot of examples of “Low” risk portfolios holding way too much in risky assets.

Our Financial Planning team would caution that you should always stay true to the risk level required to achieve your objectives. Everyone wants to achieve the greatest return, but if you don’t need to, why expose yourself to the chance that you’ll lose.

“Why does it still take several days to transfer a withdrawal from the portfolio into my current account? When I pay a tradesman or credit card bill by bank transfer, it can be done immediately or, at worst, in 2 hours. Why is a portfolio withdrawal different? Are they still in the dark ages?”

This is a really good question, and being honest, it is a frustration that we share with both the platform providers (Standard Life) and the fund management teams on a regular basis.

The key difference is that the money is not invested in liquid cash like it is in your current account. Units of all different types of investments are purchased, and these need to be sold down to cash before a withdrawal can take place – there is an extra stage in the process.

Platform providers and fund management groups also have to deal with millions of trades per day, across all different time zones. They also need to ensure each sale receives ‘best execution’ which in simple terms means the best price for the time of sale on any one day. As you can imagine these things can slow the process significantly, but ensures that everyone is treated fairly.

Overall, it can’t really be compared to a cash withdrawal, but we agree that they could do things to marginally improve the speed, and we are pushing for this.

“What products should I consider starting for my children (or encouraging my children to start) investing in once they get to 18?”

We find it hugely disappointing that there isn’t more help and education around the options for younger people. This is one of the main reasons we have launched our iAspire proposition (more information here).

ISAs are a good starting point as they provide great tax benefits and are very liquid (unlike a pension where you cannot withdraw your money until 55 in most cases). However, with interest rates remaining very low, they should certainly consider an Investment ISA (also known as Stocks & Shares ISA) if they plan to invest the money for longer than a few years.

Help-to-Buy ISAs and Lifetime ISAs can also be great for saving for first homes, as it is possible to receive a 25% uplift on your savings from the government under certain circumstances.

However, as with anyone, it is really important to consider the person’s specific circumstances. We would therefore highly recommend getting in touch with us about iAspire.

“Do you think you can repeat the 52% my Low Risk Portfolio has returned since I invested it 10 years ago?”

As stated previously in this blog, we have been through a very positive period for markets and are now entering a more challenging phase. However, we do not expect this period to be prolonged, and are very positive about the opportunity set that will exist once it has played out. Our target for the Low Risk Portfolio for example, is 3%-5% per annum over any rolling five-year period and there are some key reasons why we believe this is absolutely achievable.

To reaffirm, we do not expect the current challenging environment to last for 10 years and even within this period we are starting to see some opportunities. It is important to stay patient as we build and prepare the portfolio for the next stage of the cycle, so even in this period of adjustment, we feel we are positioned strongly. Our flexible mandate allows us the room to stay well away from the areas that are of greatest risk, and become convicted to those where we feel the opportunities lie. We still have some great ideas in the portfolios which can drive returns, but we do not expect the markets to give us much of a helping hand in the short term. Finally, our team are truly dedicated to the job at hand and are working tirelessly to ensure our clients have the greatest chance of achieving their objectives.

So can we recreate the last 10 years? Yes, but it is going to be tough in the short term. Can we hit our return targets? Absolutely.

Thanks for reading! Please look out for the IC’s ongoing correspondence, including our Investment Review of Quarter Three, which will be released in October. In the meantime, should you have any further queries, please do not hesitate to contact the office or send an email to questions@dbwood.co.uk.