Here at PortfolioMetrix our investment philosophy is fundamentally risk-based because we believe clients expect to see predictable risk and return separation. This is particularly true at times of market volatility of the type we’ve been seeing over the past few months and which looks like continuing for the foreseeable future.
It’s this focus on really tight risk control that has enabled us to deliver portfolios that are very closely aligned to our clients’ expectations over the three years we’ve been active in the UK.
To coincide with our three-year anniversary on 10 January 2016 we analysed the largest 20 open Balanced funds with a three-year track record. Combined they represent £41 billion of clients’ assets. This exercise showed that only a couple of funds had a slightly higher return than PortfolioMetrix for the equivalent level of risk, with the majority falling short.
In fact, we were shocked at just how far off the mark the majority of the funds were, with most delivering significant under-performance and exceeding what we would consider an acceptable level for balanced market exposure.
When markets are volatile it’s easy to explain low performance as being a direct result of those conditions but we believe the levels of underperformance in many of the funds are selling investors short.
Noise in the media about market conditions plays its part in why clients invested in many of these underperforming funds stay where they are. A good case in point is the FTSE.
The UK obsession about the performance of the FTSE means its rise and, more recently, its falls constantly make headlines. Such a barrage of negative news means it’s natural for many clients to directly attribute a fall in their own portfolio with a drop in the FTSE, even if their investment is diversified and is not reliant on the ups and downs of what is a fairly narrow selection of stocks.
The balanced funds we analysed are the largest and perhaps it’s the fact they are so large that leads to a false sense of security for both advisers and clients.
What we set out to do with our investment proposition is challenge the perception that balanced will always equate to low return when markets are volatile. The results we achieve speak for themselves and prove that taking an academically-robust, risk-based approach can lead to returns that meet, not fall below, the expectations of the people who trust us to manage their investments.