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Portfoliometrix Investment Proposition

“WORKING WITH PMX IS LIKE HAVING A HIGHLY QUALIFIED IN-HOUSE INVESTMENT TEAM WHO ARE ALWAYS AVAILABLE TO DISCUSS ANY QUERIES OR REQUIREMENTS WE HAVE.”
ED HOLDER, HOLDER AND COMBES
PORTFOLIOMETRIX INVESTMENT EDGE

The most obvious benefit of working with PortfolioMetrix is the opportunity to significantly enhance investment outcomes. This doesn’t just mean the potential to generate superior returns, but also to increase portfolio robustness through a rigorous, well-engineered process. Consistent risk-adjusted returns, compounded over the life of a portfolio, significantly reduces shortfall risk and increases investor well-being.

PortfolioMetrix uses a number of different investment techniques to augment expected portfolio returns but rejects the use of methodologies, regardless of their popularity, that have been shown to add little benefit or that risk destroying value.

PortfolioMetrix specialises in asset allocation, fund selection, portfolio construction and rebalancing, all of which contribute towards the end result of more money in the client’s pocket. Click below to understand how PortfolioMetrix add Value via these methods.

ASSET ALLOCATION

Asset allocation has been shown to be the most important driver of long-term performance and volatility. Getting the asset allocation right is therefore the most important underpin of long-term investment success. At the heart of good asset allocation is robust diversification, which reduces the risk the investor takes. At the same time, potential returns are improved by investing in different areas that react differently to the same event.

PortfolioMetrix uses an up-to-date, academically sound approach to asset allocation that is setting new industry standards in many important respects.

Our approach:

  • blends historic data and forward-looking economic views
  • incorporates the investor’s key requirements
  • increases diversification across different asset classes
  • does not involve trying to ‘time the market’ (a killer for suitability!)

Left to their own devices, most investors would not employ a scientifically-based asset allocation approach, nor would they have the resources to do so. Typically, self-directed investors tend to be attracted to the extremes of the risk spectrum, either heavily tilted to cash, attracted by the safety and simplicity; or predominantly in risk assets such as equities, driven by the allure of higher returns. These investors are not considering the opportunity cost of being over-exposed to low-risk, low-yielding assets or the potential composure issues and down-side risk associated with very volatile, pure equity portfolios.

FUND SELECTION

PortfolioMetrix prefers a best of breed approach to portfolio construction so typically uses third party funds to populate the investor’s asset allocation. The types of funds blended together to form the portfolio will depend on the investor’s individual preferences (see the section on portfolio customisation).

PortfolioMetrix runs a detailed selection process designed to target Certain Criteria based on the type of fund:

  • Active Long Only funds -> High Active Share, Low to Medium Tracking Error, Low to Medium Factor exposure, High Alpha
  • Market Cap weighted Passive funds -> Low Tracking Error, Low Overall Cost, Operational Stability
  • Factor based (Smart Beta) funds -> Low Tracking Error, Reasonable Cost, Systematic Exposure to Historically Attractive Investment Characteristics
  • Absolute Return funds -> Consistent Returns, Consistent Volatility, Reasonable Cost, No Leverage

DISCIPLINED BALANCING

Over time, asset allocations within a portfolio will ‘drift’ from the target allocation due to the relative performance of the assets within the portfolio. Typically, this is because higher risk assets such as equities outperform lower risk assets like bonds over the long term. The result is the equity weighting would be likely to increase at the expense of bonds resulting in a portfolio that is riskier than originally targeted.

Portfolio rebalancing is the process of reducing this risk mismatch, through purchases and sales of assets in the portfolio that move weights closer to the target allocation. Left to their own devices, most investors would not rebalance as it seems counterintuitive: taking money out of well performing assets and re-allocating this money to assets that are not performing so well.

Whilst rebalancing is designed to control risk, not maximise returns it is however this discipline that adds to the investment returns as it forces the sale of some assets at a higher price and the subsequent purchase of other assets at a lower price, thus locking in profit.

PortfolioMetrix has taken the concept of rebalancing, which is normally done on a calendar basis (done at the same point in time whether the portfolio needs it or not) and extended it to a disciplined approach, only rebalancing when the portfolio will benefit from it. We have shown that this disciplined rebalancing methodology can improve the investment returns and risk control compared to the most simplistic calendar based approach.

RISK CONTROL

Higher return seems like an obvious criteria when evaluating a portfolio, but results need to be viewed slightly more analytically through a risk based lens. A 100% potential return sounds great, but what if the chance of losing all the money invested is slightly more than 50%? Suddenly this seems less appealing, because what is being described here is just the dynamics of playing roulette. Whilst it is true in general that higher returns require taking higher risk, not all risk is rewarded with increased expected returns. The key to good asset management and control is to ensure both that the right amount of risk is being taken, and that the investor is being “paid” for the risk they take.

Therefore, return should never be reviewed in isolation, but always through a lens of return per unit of risk taken.

Risk control is of equal importance to advisers and investors alike:

  • From an investor’s point of view, if the investment manager doesn’t take enough risk the investor could be disappointed by the return achieved. Conversely if too much risk is taken the investor’s composure could be challenged resulting in the investor intervening and pulling out of the portfolio at completely the wrong time.
  • For advisers, poor risk control within the centralised investment proposition can undermine the whole suitability process. As demonstrated in the chart below, bad suitability outcomes occur if clients that are expecting lower risk experience high volatility, and if clients that can tolerate and are expecting higher risk experience low volatility along with low returns.
THE VALUE OF GOOD RISK CONTROL

The charts below, covering a recent turbulent month, demonstrate the value of good risk control as part of a robust portfolio construction process.

In the first half of the month markets tumbled. Looking at the PortfolioMetrix portfolios however, two drivers of good risk control are apparent.

Firstly, all the PortfolioMetrix portfolios, including the riskiest, fell less than the FTSE 100. This is a key benefit of diversification – the ability to limit extreme losses and decrease risk overall.

Secondly, falls were limited particularly well in lower risk portfolios (the portfolios clients most sensitive to losses would hold). This consistency is another key benefit of the asset allocation process.

In the later part of the month the markets bounced back and by the end of the month had moved into positive territory for the month.

Again the PortfolioMetrix portfolios maintained consistency across the range, but now also demonstrated out- performance on the up side in a number of cases.

Compare for example the journey of an investor who only invested in the FTSE 100 vs the mid-risk PortfolioMetrix 4 portfolio. At the worst point during the month the FTSE100 investor was down over 8%, but if they held their nerve, recovered to add 0.8% for the month. The mid-risk PortfolioMetrix 4 investor was down just over 3% at the same point the FTSE100 investor was down 8% and recovered to have a similar 0.8% return for the month. Both reached the same destination, the one just had a much more controlled, composed and pleasant journey.

PORTFOLIO CUSTOMISATION

PortfolioMetrix favours a new innovative multi-dimensional and flexible investment method that can be tailored to each client. However, due to the technology limitations of some popular platforms, we currently also offer a range of model portfolios.

Our belief is that whilst scalable, model portfolios can limit advisers’ ability to offer a fine-tuned investment option, forcing them to either shoe-horn clients into portfolios that are ‘almost right’ or select portfolios outside the model range.

Equally the traditional discretionary management approach of requiring an individual investment manager to meet with the investor to understand their preferences is an expensive luxury, which often suffers from a lack of consistency and repeatability.

The PortfolioMetrix customised proposition is designed to meet the needs of investors and advisers alike. Using our multi-dimensional portfolio construction approach, the investment team map out all practical combinations of constraints ensuring a wide range of choice, whilst safeguarding that all choices are fit for purpose. This method eliminates the shoe-horning and consistency issues leading to more satisfied clients, whilst allowing for the service to be delivered at a very reasonable cost.

PORTFOLIO CUSTOMISATION DIMENSIONS

Tens of thousands of unique portfolios exist in the PortfolioMetrix proposition ensuring a good range of investment options for a large and diverse investor base.

The following dimensions describe the different portfolio customisations available via the PortfolioMetrix Proposition:

Risk Score
Arguably the most important option is the ability to select a level of risk in the portfolio that the investor will be comfortable with. PortfolioMetrix offer a risk score that runs from 1 to 100.

Currency
Portfolios can be optimised for investors with liabilities in Great British Pounds (GBP), Euros (EUR) and United States Dollars (USD).

Asset Class Constraints
Certain asset classes can be excluded from portfolios to better align with the investor’s financial plan and other personal holdings. One example would be constraining the use of Property in the portfolio if the investor has additional property holdings elsewhere.

Passive Tilts
Passive market cap index funds can be blended with the funds inherent in the Investment Approach to offer gradually cheaper and cheaper implementations of the Investment Approach as one tilts closer towards a 100% passive implementation.

Core Active (Investment Approach)
Portfolios are implemented using the fewest constraints, resulting in a well-diversified global asset allocation, implemented using a blend of actively and passively managed funds. Active managers are only used when PortfolioMetrix has sufficient conviction in their being able to outperform.

Enhanced Indexing (Investment Approach)
Enhanced Indexing (Smart Beta) is a factor based approach to investing that typically costs less to implement than traditional actively managed portfolios but which still have the potential to outperform traditional passive implementations. PortfolioMetrix considers and blends a subset of a number of academically robust factors, including: Value, Size, Momentum, Low Volatility, Quality and Liquidity.

Tax Efficient
Similar in investment approach to the Enhanced Indexing Portfolios. However where possible investment vehicles subject to Capital Gains Tax and Income Tax are used in order to offer an option for investors who wish to avoid using vehicles subject to exit taxes.

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The value of investments and the income received from them can fall as well as rise. Investors may not get back the amount invested.

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