Q. I keep hearing from yourselves and others about Model Investment Portfolios. I think I understand the premise here but can you please summarise why you use them and how the ones you use work in practice?
A. We have used these for around 6 years now, and it came from the realisation that trying to pick ‘the best’ funds for clients was becoming too unreliable.
Extensive research that focusses on academic studies showed that passive funds were potentially a much more robust answer, and that asset allocation was the key. That is, in what proportion do you hold the main asset classes of equities, property, bonds and cash? The mix here in a portfolio affects the returns you can expect as well as the volatility (risk).
We have provided links below to keep this answer succinct, and of course it is all about having an investment strategy based on your goals in life, risk tolerance and timeframe.
So, once we have measured your propensity to risk, and have the context of your own financial map, we can identify the level of risk that you are comfortable with as well as checking that the projected return will enable you to achieve your goals.
This points us to the appropriate portfolio, and within this is the split between, for example, UK equities and emerging markets etc.
These are then populated by asset class passive institutional funds through what is called a Wrap Platform, meaning essentially that you get the ‘wholesale not retail’ price as well as diversification.
We adopt a buy and hold strategy, and once a year we ‘rebalance’ the portfolio to ensure your risk parameters remain steady.
Funds are rarely changed, as they are simply the vehicle through which we obtain access to the asset class we want to buy.
Recently we identified two funds that can improve tracking and reduce your costs, so changes were made to the portfolios.
It is the interaction of the asset classes within the portfolio that effectively creates a ‘portfolio for all seasons’, and gives you the best chance of achieving a successful investment experience.
This has been borne out in the recent extremely volatile markets, where the portfolios performed in exactly the way we designed them to, giving our clients much appreciated peace of mind.
We hope this helps you!
Here’s some more useful reading: