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Our discretionary investment management service allows you to have some or all of your investible assets managed without you being responsible for the buying and selling decisions. Many clients use this for all of their assets and it can be especially valuable for those whose place of work has strict compliance requirements. Under this service, we agree a risk profile and an investment approach for your portfolio with you and then we will execute investment decisions on your behalf within these parameters.
Under the investment advisory service, we will deal with your portfolio on an advisory and execution only basis, where we recommend investment transactions and you decide whether to proceed with our recommendations. If you decide to proceed then we can carry out the transaction on your behalf. Whichever of these services are used we initially assess whether investing through one or more of our managed funds could form part of a suitable solution for you and in many cases this will comprise the whole of a client’s portfolio. However, where we believe that other investments would better meet the needs of a client then we will include these within the portfolio.
We believe that a key to successful investing is a constant supervision of all aspects of a portfolio. We therefore limit the number of positions in which we invest so that we are able to follow each of them closely. Our investment process is driven by quantitative analysis of hard data and supported by a pragmatic approach to investing.
We believe that diversification across a broad range of strategies and markets will enhance the risk/reward characteristics of a portfolio. We do not believe however that we or any other one person or institution can be an expert in every stock, market or strategy. We therefore believe in using the services of managers whose track record shows them to have superior skills in their specialist fields. We aim to design portfolios which have a broad range of investments while selecting those strategies and markets which our research show to have above average prospects of meeting our goals.
We believe that markets can be inefficient, which means there are opportunities for highly competent fund managers to make profits from relative value and arbitrage opportunities. The managers we select have typically shown they can generate significant outperformance over the long term through skill. In the same way there are times when we in turn seek to exploit the same market inefficiencies.
We have a long-term perspective when we invest. We read the news, diligently perform our daily research and even sometimes watch the hysterics on CNBC, but we do not react to short term market noise.
We do not believe there is a need to take complexity risk. History has shown that adding complexity to financial products enables the product distributor to pocket large fees, often leads to conflicts of interest between seller and buyer and regularly results in substantial losses. Unless the risk/reward potential is exceptional we do not invest in such products.
We manage money for absolute return not relative return. We have found that most people are more interested in increasing the purchasing power of their money rather than keeping pace with an arbitrary benchmark. We do not differentiate between income and capital gains when developing our portfolios except where this is relevant for tax purposes. We access an unconstrained style of investing without the normal lockups imposed by such managers.
Markets change continuously rather than in discrete intervals. The use of our managed funds as described above allows us to actively manage the portfolio to take account of these changes. In addition, we believe it is appropriate to have frequent investment reviews driven by market conditions and changing client circumstances rather than merely having an annually scheduled review.
We try to minimise the “frictional” costs of investing such as brokerage fees and bid-offer spreads. Unnecessary costs are lost profits. We believe that many money managers are more concerned with matching a benchmark than they are about making money for their investors. They therefore overtrade. We believe in doing our homework thoroughly before making any investment and only doing so when we are convinced of the medium to long term prospects. As a result our regular reviews will generally confirm the original decision and result in our trading infrequently. When we trade we will minimise costs by using low cost or fixed price platforms.
We always try to purchase assets at no worse than fair price. This sounds obvious, but investors often unwittingly overpay for assets. For example, we look to buy an investment company’s shares when it is trading at a discount to net asset value (“NAV”, which is the underlying value of its assets per share).
An essential part of the due diligence we perform before making an investment is designed to avoid those investments which might be susceptible to pitfalls such as over-leverage, contagion or fraud. It is however never possible to guarantee that this so called “event risk” will not occur. The diversification of our portfolios serves to mitigate the impact to such events and we typically limit an individual investment position to 10% of a client’s portfolio.
Investors are not rational thinking machines, they are fallible human beings who have many inherited evolutionary biases which are not particularly conducive to successful investing. Biases such as loss aversion, overconfidence and lack of self-control inhibit long-term investment performance. Behavioural analysis of investors helps to explain why markets overreact and move in cycles as investors buy near the top because they fear missing the “opportunity of a lifetime” and sell near the bottom as fear of further losses causes panic. Being aware of these risks reduces the risk of Activus succumbing to such evolutionary biases in its investing.
We do not assume that automatic portfolio rebalancing is appropriate for everyone. The method for rebalancing a portfolio depends upon the client. Some clients simply want to earn the return of their initially agreed portfolio, so a “buy and hold” strategy may be appropriate. Others want to maintain the same risk profile regardless of wealth, so more frequent rebalancing may be called for – these people have a “convex” risk profile, i.e. their risk profile actually goes down as their wealth increases due to the rebalancing. Others still may have a fixed amount of money which they do not want to risk and so as their wealth grows they can allocate more into the “risky” part of their portfolio – these people have a “concave” risk profile, i.e. their risk profile goes up as their wealth increases.
We do not employ leverage at the portfolio level unless requested by the client. However, some of the Funds we invest in may employ leverage, particularly those which use sophisticated strategies to seek to make money in all market environments.
We prefer permanently capitalised vehicles by which we mean closed-ended companies, such as investment trusts and quoted company shares, versus open-ended companies, such as OEICs and Unit Trusts. There are a number of reasons for this preference:
Being closed-ended eliminates the need for the Fund manager to concern himself with new contributions or redemptions, thus releasing time to focus on investment matters.
Investing in illiquid assets or strategies is a major issue for open-ended companies since if there are significant redemptions, the Fund may become overweight with illiquid positions.
Open-ended companies typically have a portion of the Fund permanently invested in cash or short-term money market instruments which are generally a drag on performance.
Investment companies can employ leverage to augment returns.
Closed-ended companies have an independent Board who represent the shareholders. One of the outcomes is typically lower Fund charges than open ended companies.
Investment companies have outperformed open-ended companies in virtually all sectors (source: Association of Investment Companies).
Since these shares can trade at a discount or premium to NAV, we are able to use our proprietary software to highlight investment opportunities.