At FE Investments, we see ourselves primarily as a risk manager, aiming to optimise diversification and avoid unwarranted risks within investment portfolios. In this post, we review the top five investment decisions we made in 2019 as a result of our robust and distinct investment philosophy.
Leveraging the process: deep knowledge
- Balance – we frequently highlight the balance of quantitative and qualitative methodologies that we use to analyse funds prior to selection for our investment portfolios. Over the past couple of years, we questioned the Woodford investments team on issues ranging from the inclusion of private equity investments, to the drivers of his investment performance (strong quantitative performance) and the distribution of analytical resource within the team. As a result of our qualitative analysis we removed the Woodford Equity Income Fund from our shortlist in 2017. We avoided the risks that we felt were unwarranted: the Woodford funds didn’t make it into our portfolios at any time.
- Liquidity – the topic of liquidity is a reoccurring theme. It began with Woodford and occurred again within directly invested property funds. Liquidity constraints and consequent underperformance arose with the Brexit referendum. Prior to the General Election, we expected a similar effect on direct property funds. We sold our positions in October 2019. Property exposure, where it is incorporated in portfolios, is through REITs which have performed well without the same liquidity constraints.
Risk at the forefront of our philosophy
- Stress testing – we spend significant time testing our assumptions on risk, leveraging stress testing software and blending quantitative analysis with the skill of our highly qualified portfolio management team. Earlier in 2019 we introduced mid and small cap funds into our portfolios. This was in line with our analysis that a sharp rise in sterling could be detrimental to portfolios. Following the general election in December, sterling appreciated in value; small and mid-caps outperformed the FTSE 100.
- Bell bar approach to asset allocation – we are frequently questioned about our significantly larger allocation to gilts when compared to other DFMs; the average DFM will take a similar approach to investing as its peers. The gilt position anchors our portfolios in times of market stress and reduces dips in value as investors rush to safety. To balance the bell bar, and when markets appreciate in value, we adopt a higher beta approach to our equity position. In the third quarter, portfolios were helped when gilts held up and equity markets dipped; at year end, the net effect was positive for portfolios as equity markets recovered.
- Calling markets was very difficult – during the year we saw expectations of a recession, a full-blown trade war, and a no-deal Brexit. The views of the direction of the economy from equity markets and bond markets diverged, and expectations of the direction of interest rates varied considerably. We ignored the noise and remained focussed on taking the appropriate amount of risk for clients, aiming to avoid unwarranted risk and maximising diversification. This resulted in performance between 2.96% and 21.41% for the lowest and highest risk portfolios; the majority of our portfolios outperformed the IA mixed asset sectors they are benchmarked against.
In 2019 FE Investments added the Mosaic Portfolios to our range of model portfolios. Following adviser feedback the Mosaic range was introduced to meet the needs and requirements of more sophisticated clients. The 15 portfolios are designed to reduce concentration risk for advisers and clients who prefer more holdings within their portfolios. Mosaic portfolios also offer more detailed reporting for clients who wish to have a greater understanding of the investments in their portfolio.
FE investments delivers independent portfolio management that combines our hallmarks of simplicity and clarity with our focus on risk and diversification.
If you’d like to learn more about our investment process and how we work with advisers, please contact us.
You can also attend one of our popular quarterly market update events to hear our view on markets and how this could impact your clients’ investments, see events calendar.
Investments carry risk. Past performance is not a guide to future performance.