Is your investment portfolio performing?

2016 may have been contentious in the world of politics but it was a good year for stock markets. Was it good for your portfolio? Matt Hodge, Director in Buzzacott’s Financial Planning team, explains why you should not take investment performance at face value.

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2016 investment returns suggest that many discretionary investment managers significantly underperformed. In our experience, disappointing results year on year are often going unchallenged or are masked by the performance of the markets; 2016 was not a one-off in this respect.

Last year in the UK, the FTSE 100 produced a total return of 19.1%. Compare this to the return of the WMA Balanced Index for 2016, which was 17.1%**. This index is made up of underlying indices that represent the main asset classes commonly used in a ‘balanced’ risk portfolio. It effectively models an investment manager who uses a relatively static asset allocation, populating with funds that ‘track’ relevant assets or markets. The WMA index return does not include investment manager fees but even so, taking this relatively static approach would have given returns aligned to market performance.

But the ARC Balanced Index tells a very different story, with a return of 8.9%. The ARC indices are based on real performance numbers provided by participating discretionary investment managers for given risk profiles. Therefore, the indices are more representative of investment managers making active asset allocation and fund/stock selection decisions, as well as taking fees into account. Given that this is an active approach; we would have expected performance to have been better.

Some might say an 8.9%* return for a ‘balanced’ risk portfolio is still attractive. Crucially however, the chosen investments may not have added value compared to the level of risk taken, or even captured all of the return given by the markets performance. Therefore, we encourage investors to ask their investment manager if they have added value by additional returns or by reducing risk compared to indices.

The key to ‘diversified’ portfolios

An investment manager overseeing a ‘diversified’ portfolio has two key decisions to make.

The first is asset allocation – a manager will need to decide whether to deviate from the sector average for a specific risk profile. For example, if a standard ‘balanced’ portfolio has 60% of its portfolio in equities, a manager may choose to cap theirs at 50%; therefore returns will differ to the average.

The second decision is fund/stock selection, where a manager obtains exposure to those asset classes with specific investments. Here again, these choices will impact performance.

The Buzzacott view

While the FTSE 100 return of 19.1% appears highly attractive, it is worth remembering that being fully invested in the FTSE 100 from November 2007 to October 2008 would have resulted in negative returns of -32.30%. Few investors today would wish to be exposed to just one market and asset class; diversification is crucial.

Our expertise and experience helps us to interrogate portfolio performance in greater detail. We align asset allocation to our clients’ risk profiles, regularly reviewing and rebalancing. Our approach continues to build rewarding relationships with our clients, who trust us to control risk, reduce cost and capture market returns.

For more information or advice tailored to your circumstances, please speak to your usual Buzzacott contact or email enquiries@buzzacott.co.uk.

This article first appeared in the fourth issue of our firm-wide magazine, Beyond the Numbers. To download the full magazine, please click here.  

*ARC Balanced Index

**No fees apply to the WMA indices as they are hypothetical indices whereas the ARC indices are net of investment manager fees.

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