Getting the right blend of investments is crucial in any portfolio, says Ian Lowes, managing director of Lowes Financial Management.
As independent financial advisers, when we construct an investment portfolio for our clients, we are looking to provide good long-term returns while protecting capital as much as is possible. To do this, diversification is the key.
We achieve this primarily through the use of collective investments, and then through a selection of different funds and fund managers.
It is important also that the funds used are carefully chosen to complement each other and to make sure the overall portfolio matches the agreed level of risk. All too often people base their fund selection purely on performance tables, only to find that what they thought wasa diversified portfolio is, in fact, invested in the same underlying companies, or what they thought was a good fund manager was someone who just happened to hit lucky for one brief period but then is never able to repeat that success.
This underlies perhaps our most important investment premise – we never recommend an investment without making sure we fully understand exactly how it works. At Lowes we spend a lot of time looking ‘under the bonnet’ of funds to find out how they have been making their returns.
This is at the forefront of our minds when building a portfolio. We look for funds that have a long-term track record of performing well but we aim also to put together funds that do not all have the same approach and philosophy.
All investments are going to have periods of underperformance, but if we can get the blend right then some funds will do better than others at different times, helping to smooth out the overall performance of the portfolio.
Once a portfolio has been constructed, we continue to monitor it and we will replace funds where necessary.
However, it must be remembered that any investment based on the stockmarkets should be held for the medium to long term, so if a fund starts to underperform, while it is easy to look at it in isolation and feel it should be sold, it is important to keep in mind that the fund was selected as part of a portfolio for a specific reason.
When possible, we always choose funds with clear objectives and a fund manager with a proven track record.
We have a strong conviction that a good fund manager doesn’t become a bad one overnight, so when a fund isn’t performing we go back to our reasons for choosing it in the first place.
If the investment philosophy of the company has changed or the fund’s focus has shifted from its original strategy then we might look at an alternative. But, just as easily, it could be that the fund was picked as a balance to another fund that is currently performing extremely well.
In a year or two that might have changed and at that point the fortunes of these two funds could be reversed, which is why they were chosen in the first place. Selling the first fund would have led to the portfolio being unbalanced over the long term.
We look past the performance figures, understand how and why a fund works as it does, and make sure our decisions are based on facts and not emotions when including them in our portfolios. For the same reason we do not just use mutual funds/unit trusts in investment portfolios.
Where appropriate we also like to use structured products because they can bring an added element of diversification to the mix.
Structured products are innovative products that come in various forms but what we like about them is their ability to deliver defined returns at a set time in the future. Some will even provide positive returns when a stockmarket like the FTSE 100 has fallen over the investment period.
Selection of products must be carefully undertaken because, just as with mutual funds, not all products will be suitable for all investors. At Lowes we have been researching and recommending structured products since the 1990s and we have a regularly updated list of products that we prefer and would use on a day-to-day basis in the portfolios we construct for our clients.
By using these blended elements to create balance and diversification, we look to build portfolios that will outperform in the long term. Lowes Financial Management was an award winner at the Moneyfacts Good Advice Awards 2009, 2010 and 2011.
Ian Lowes is managing director of Lowes Financial Management. Tel: (0191) 281 8811; Email: firstname.lastname@example.org ;web: www.lowes.co.uk