Our Approach to Investment Management
Cavendish Ware's investment approach stems from our overall philosophy – everything should be driven by effective financial planning.
The approach we take to construct and manage a portfolio for our clients follows a number of key steps, once we have gained a clear picture of the financial planning position, and this section sets out the key steps and methodology behind this approach.
Risk Profiling
Too often in the past have financial advisers used generic, highly prescriptive terms such as Balanced, Cautious or Aggressive to box clients in to pigeonholes that are not necessarily representative of their true attitude to risk.
At Cavendish Ware, we believe that risk profiles change from person to person, day to day and investment to investment. You may, for example be willing to accept a greater degree of risk with some of your investments than you are with others. You may be prepared to bet a pound on the toss of a coin, but would you bet your house? What is at stake alters risk tolerance, and risk is meaningless without consequences.
In addition, unless you are a highly experienced, sophisticated investor, you may not be able to give a name to your true attitude to investment risk. It should be remembered that risk could be highly subjective, as what might be ‘high risk' for one person, may be ‘low risk' for another, and of course individual circumstances change.
So before we look at investment and risk issues, therefore, our first task is to gain a very clear picture of our client's current financial position, aims, objectives and requirements, as this will have a major impact on both our strategic and tactical advice.
The next step is to gain an in-depth understanding of the risk profile of our clients, and in doing so ensuring that the client themselves understands what this means. This is achieved by using a sophisticated psychometric questionnaire that looks for answers both on a conscious and subconscious level to get closer to each clients genuine attitude to investment risk.
Cavendish Ware looks at your personalised ‘risk position' rather than box our clients into cautious, balanced or aggressive. We understand that our clients risk tolerance will change throughout their lifetime. We therefore look to constantly review their position.
Portfolio Construction
To achieve the goals and objectives that we identify with our clients, Cavendish Ware uses a combination of Cash Management and Absolute Return portfolios alongside more traditional Risk Based portfolios. Within these portfolios, we utilise a wide range of funds, which we constantly review and manage.
Focused Portfolios
Short Term Strategy is predominantly a cash management portfolio, using a range of cash deposits, with occasional use of shorter-term fixed interest funds, to provide very stable returns. These will be used as either part of a long term strategy, or as a ‘safe haven' in times of market turbulence.
Targeted Return is a specific portfolio aimed at providing a targeted return of Cash plus 3%-5%, irrespective of market conditions. This is done through a combination of Cash, Fixed Interest, Hedge funds, Property and Alternative funds that do not closely correlate to the equity markets.
Risk-Based Portfolios
We use modern portfolio theories, based on the principle that for every level of risk that exists it is possible to construct an investment portfolio that will produce the required returns for investor within the relevant volatility expectations. We currently have 7 distinct portfolios that are based on these principles. These incorporate 2 key elements:-
- Asset Allocation, which is concerned with how you spread your investment between different asset types and regions.
- Fund Selection, which is concerned with the decision of which fund managers and funds to use for each of the different asset sectors chosen.
Strategic Asset Allocation
We use modern portfolio theories, based on the principle that for every level of risk that exists it is possible to construct an investment portfolio that, mathematically, delivers the maximum investment return over time for that specific level of risk, driven by volatility models. This creates an “efficient frontier” and once we have determined the level of risk you are prepared to expose your investment to, we then construct a portfolio that lies on the efficient frontier.
To do this, we use a highly sophisticated investment modelling system that analyses how different asset classes deliver investment returns over time and optimises the blend of these assets classes together (such as cash, equities, property, government and corporate debt) to get you as close as possible to the efficient frontier.
Statistically, over 90% of an investment portfolio's volatility and variability is determined by its asset allocation. However, this process is not ‘forecasting the future', and there are no crystal balls. It scientifically aims to de-risk a portfolio and provide a diversified approach at a strategic level.
Geographical Sector Modelling
This asset allocation model will be adjusted to take into consideration differing objectives and time horizons as part of an overall portfolio, but it is intended to encompass all underlying investments, including pensions, ISA's, etc. Unless there was a specific reason to do so, we would not treat one part of a portfolio in isolation. However, we may use the different tax treatment, access and flexibility of certain holding vehicles to drive where each asset is held. The aim is always to achieve the maximum net return.
The portfolio, irrespective of asset ‘class' should be well diversified across a number of geographical centres to ensure correctly weighted exposure to international markets. Within this will fall a number of asset classes to remove the all too common over-reliance on single asset types of geo-specific markets.
Cavendish Ware believes that portfolio construction should remain bespoke and individual to each client. This graph demonstrates one possible portfolio allocation based on a theoretical risk profile.
Cavendish Ware combine the research carried out by a number of global leading investment consultants,, using these modern portfolio theories (historically only available to institutional investors), with the advice given by Cavendish Ware's Investment Review Board (see below).
Cavendish Ware Tactical Overlay
The first job of the Review Board is to take the risk-based strategic model, and apply where necessary an element of tactical decision making. These adjustments will take into consideration shorter term economic, social and political issues that may affect each asset class. This allows Cavendish Ware to make shorter term, tactical decisions with regard to the use of specific asset classes, where it feels it is prudent to do so. These are intended to be minor adjustments to the asset allocation models provided by the investment consultants we use. We feel this is important, as the models are based on 30-50 year historical data, and whilst the theories that support this approach work over these time frames, we feel that certain shorter term issues need to be allowed for.
In addition, Cavendish Ware has developed a unique proprietary mechanism to adjust the risk-based element of our portfolios. This mechanism allows us to de-risk the portfolios in certain, key situations by moving the whole portfolio down the risk scales that we apply:
Traffic Light
Green - Normal market conditions mean a normal participation in the risk-based portfolios
Risk Level reduction: 0
Amber - Concerns of the overall market outlook may necessitate a move the portfolio down to a more cautious structure
Risk Level reduction: -2
Red - Serious concerns over the economic outlook means that we move the portfolios to a very cautious position
Risk Level reduction: -4
Time-factor
The closer an individual is to an event when the money is known to be needed, the higher the risk that market falls will not give equities the time to recover.
Cavendish Ware apply 2 levels of ‘time factor' adjustment
Within 7 years - 1 risk level reduction
Within 3 years - 2 risk levels reduction
This enables us to protect our client's portfolio in difficult market conditions, and maintain their capital as they approach the time when the capital will be crystalised, such as retirement.
We believe that by having this tactical overlay, we can further enhance the overall returns to our clients. The decisions with regard to the CW traffic Light system are taken by the Investment Committee.
Fund Selection
The final initial stage is fund selection.
Initially, the universe of all funds available are filtered down to a more manageable number through the use of key analytical measures determined by our investment review board.
The short list of funds that fulfil our criteria is then subjected to in-depth analysis, using both quantitative (definable, statistical research relating to risk management, performance) and qualitative (interaction with the fund manager and their team, understanding their philosophy and style) research methods. We aim to meet with all of the fund managers we invest with, and continually review the individual manager alongside that of the fund. We analyse the philosophy, style and performance tendencies of collective investment schemes.
We have the functionality to drill down into each fund and then provide an overall analysis of the total portfolio and its underlying holdings, risk characteristics and style blend. This ensures that, in putting the overall portfolio together we are maintaining the appropriate risk strategy.
Our ‘Buy' list holds a maximum of 60 funds, the “CW60”, spread across all asset classes and geographic regions, and we also incorporate within this a range of ‘Global Specialist' funds that will focus on certain themes.
A minimum of 75% of the funds must conform to certain criteria, including size of fund, the track-record of the fund over a minimum time period, and the rating of the fund carried out by independent rating agencies.
Up to 25% of the funds, however, need not conform to these criteria if there is unanimous agreement within the investment committee that the fund will add value to the portfolios. This allows us to include in our portfolios new funds (where we perhaps already know the pedigree of the manager), or smaller, more boutique funds. This gives us the flexibility to look for added-value returns within the portfolios.
The ‘CW60' operates a strict ‘night-club' policy (one fund in, one fund out) which ensures that the reasons for any funds inclusion or exclusion will be debated in detail. It also means that we can have very detailed knowledge of the funds we use.
The funds on our ‘Buy' list will be used to populate the portfolios we construct, but the decision of which funds to use in each portfolio will be dictated by the economic circumstances of the time. All decisions are made by the investment committee.
Ongoing Portfolio Management
At the cornerstone of Cavendish Ware's proposition is the provision of high quality service. The regular contact with our clients and review process is essential with any investment portfolio. At outset therefore a portfolio will be constructed in line with the risk profile and diversified asset allocation detailed earlier. This represents the strategic element of our process and requires constant review.
There are a number of elements to our portfolio management process.
Rebalancing
Over time, the asset allocations that are identified when the portfolio is constructed will shift depending on the performance of the different investments that make up your portfolio. Rebalancing will restore the portfolio to the asset allocation specified. The optimal time-frame is for annual rebalancing of the portfolio. Should exceptional circumstances occur, we may make individual recommendations more frequently.
Fund Reviews
The funds we recommend are actively reviewed on an ongoing basis. We are looking to identify key trends and economic conditions that may result in changes being recommended at a macro level, and fund specific issues that may lead to changes at a micro level.
Should funds breach certain trigger points, we will look to review the funds use within our portfolios. For instance, a fund that begins to perform poorly against its benchmark will be moved to a “hold” position, and the reasons behind this performance will be analysed. Following this review the fund may revert to a “buy” if we feel that the under-performance is a temporary position, or the advice may be given to sell and reinvest in alternative funds. Automatic triggers also exist for events such as a fund manager leaving, changing ownership etc.
The whole process is intended to ensure that funds that start to under-perform are identified at an early stage and proactive decisions are subsequently made.
Cavendish Ware Investment Review Board
The Investment Review Board consists of a number of highly experienced and respected investment professionals, led by Cavendish Ware's chairman, Peter Stephens. Peter was formally a director of Salomon Brothers and Credit Lyonnais, where he was Head of UK & European Equities.
The board make strategic decisions in respect of the asset allocation and fund selection for our clients.
Client Reviews
We would suggest that we hold a review meeting with our clients at least once a year, and in many instances this will be more regularly. Once we have agreed the basis on which you wish to review the portfolio, we will then automatically contact you to put this in place.
Our approach is highly consultative, and we like our clients to become as involved as they wish to be. We feel it is imperative that regular reviews, both of the portfolios themselves and of the aims and objectives driving them, not only happen, but are planned for in advance to make sure they happen. However, we are always available to our clients at any time. You will also receive regular updates and investment bulletins from us.
Summary
Our specialist knowledge & highly experienced team, coupled with access to state of the art portfolio modelling and fund review tools, enables Cavendish Ware to add real value through our investment philosophy and service.
Crucially, we have the time and the focus to look after our clients on a highly personalised basis. We combine professional investment management with a complete overview of your wider financial situation, taking a macro view of our client's portfolio and manage investments in line with an individual's objectives. We believe very strongly that no two people are alike and that portfolios should be constructed to fit individual requirements and not a generic ‘one size fits all'.
We believe that in this way we provide our clients with a true wealth management service. We pride ourselves on treating our client's money as though it were our own, and look forward to working with you to help you build and protect your wealth for the future.
If you have any questions, please call Ben Bomford, Cavendish Ware's Investment Manager, on 020 7493 6363.