In Search of the Perfect Investment Portfolio

Case Study March 2012 to 31st March 2021

These clients first invested in March 2012 and we have been meticulously recording their performance net of all fees and transaction costs they have incurred.

Their objective is wealth preservation, to simply maintain the real value of their portfolio over time, from a defensive portfolio that allowed them to sleep at night.

The benchmark used is a composite as follows

Remember that the index data incurs no costs and it is not possible to invest directly in an index. This is therefore a high bar to seek to match for a real investor net of costs.

Source: Morningstar

Impact of Charges

The first observation from the graph above is that over the full term of the investment the impact of the charges has been to bring the investment growth down from the composite index 5.07%pa to the realised return of 4.49% a reduction in yield of just 0.58%pa. All costs have been accounted for in these calculations (advisory fees, custodian fees, transaction costs and the underlying investment fund charges).

The actual fully disclosed ongoing charge to the client was as follows:

So, we can conclude that this portfolio has generated sufficient additional returns over and above the benchmark to reduce the impact of the portfolio charges by around 50%.

What About Risk?

Source: Morningstar

As we can see from the table above, our route to an average annual return of 4.49%pa was not without a few bumps in the road with the worst period in the recent past being this time last year when the portfolio declined by 6.54% in the year to the end of March 2020. Although the drop in the first three months of last year was larger at just over 11% the benefits of being highly defensive paid off as the market was down by around 30% over this period.

So we can see when the portfolio was stress-tested in a live fire environment like last year, the evidence-based construction principles of the portfolio clearly delivered a less bumpy ride.

Looking in more detail…

Source: Morningstar

We can see that in order to exactly match the benchmark return over the last 5 years, investors have had to endure a slightly less efficient portfolio (a slightly lower Sharpe Ratio) in order to neutralise the impact of their investment costs. This is simply the nature of investing. Investors receive a return as compensation for taking investment risk and from that they deduct their fees and taxes.

Our goal as advisers is to ensure that only investment risks that are worth taking are in the portfolio and that costs and taxes are kept as low as possible.

Tax

The equity part of the portfolio is almost exclusively invested in securities which qualify for Income Tax and Capital Gains Tax treatment in Ireland rather than gross roll up or exit tax.

This is critical in this case as the clients were also carrying capital gains tax losses and therefore much of the gains made within the portfolio have been achieved tax free.

In order to achieve this we didn’t just pile the clients into 15 UK and Irish Stocks (like a Stockbroker) the portfolio is still globally diversified across thousands of securities.

Source: Morningstar

What about Absolute Return Funds? They were popular at the time….

We heard a lot about how successful Absolute Return funds were at attracting the attention of Financial Brokers and their client’s money back in 2012. How did that work out?

Here we benchmark the client’s portfolio against the Standard Life Global Absolute Return Strategy (GARS)

We can see that our portfolio has outperformed the popular GARs by 3.32%pa over this period. Based on the original investment, that’s €57,209 per annum more for our clients.

What’s more, this was achieved by taking much the same investment risk.

Analysis of our Structured 40% Risk portfolio vs the Standard Life Gars Fund (2009 to 2021)

For more detailed analysis see here.

And here against the Dimensional World Allocation 40/60 Fund which launched at the end of 2015:

And, again, for almost exactly the same risk return characteristics:

Remember that in both these comparisons all gains would have been subject to Exit Tax at a rate of 41% rather than tax free capital gains due the CGT losses carried forward.

What about Gold?

Isn’t that supposed to be a safe haven?

Over the last 5 years Gold has returned about the same as the portfolio for twice the risk.

Well, surely I would have been better off with a big name Stockbroker?

ARC Private Client Balanced

What are the ARC Private Client Indices (“PCI”)?

ARC PCI is a set of risk-based indices designed to be used by private clients and their advisers in assessing the performance of any discretionary portfolio with a non-specialist mandate. There are four PCI series for each currency, designed specifically for investors with Sterling, US Dollar, Euro or Swiss Franc as their reference currency.

These cover the following risk categories:

The PCI provide a unique insight into the actual returns being generated by investment managers for their discretionary private client portfolios. The indices are based on the real performance numbers delivered to discretionary private clients by participating investment managers. There are no pre-set asset allocations; no asset class restrictions; no concentration limits; and no index performances used.

Only actual performance numbers are included in the calculation of the indices. The PCI are designed to provide an accurate reflection of the actual returns that a private client should expect from a discretionary portfolio manager for a given risk appetite. By comparing performance with the relevant PCI index, the investment manager is free to use any and all investment strategies, vehicles and structures in the pursuit of the maximum return per unit of realised volatility. The indices are available free of charge to anyone through a web-based subscription service which can be found at www.suggestus.com. Participating investment managers can use the PCI performance series in private client reporting and marketing activities.

Who is included?

Barclays Wealth and Investment Management Brewin Dolphin Brooks MacDonald Canaccord Genuity Wealth Management Cantab Asset Management Cazenove Capital Charles Stanley & Co Citi Private Bank Close Brothers Asset Management Coutts & Co Credit Suisse Deutsche Bank GAM London HSBC Global Services (UK) Investec Wealth and Investment Ireland Julius Baer International Lloyds Bank Private Banking Morningstar Investment Mgt Europe Quilter Cheviot Investment Management Rathbone Investment Management Rothschild Wealth Management Royal Bank of Canada (UK) Sanlam Private Wealth Sarasin & Partners Smith & Williamson Investment Management St James’s Place Standard Life Wealth Tilney UBS London UBS Switzerland WH Ireland

Davy are not on that list…

The Davy Cautious Growth fund was launched on the 23rd April 2013

From this analysis we can conclude that the clients could have made higher returns but only by taking more investment risk.

Of the alternatives considered, none have provided a consistently better alternative over this 9 year period of analysis.

If you would like a second opinion of your investment portfolio please get in touch.

We recently found this analysis from 2009 to 2012 which fills in the years prior to this client’s first investment almost back to the birth of our business in 2008.

Case Study May 2010 to July 2021

And here is a different client’s portfolio showing the consistency of investment returns over time:

We can see that despite some significant withdrawals the portfolio has consistently tracked the benchmark.

And on a risk-adjusted basis has consistently converted investment risk into realised returns net of all fees and expenses.

Here we compare the client’s actual performance net of all fees and expenses with the Davy Long Term Growth Fund since its launch in 2013. Note that our client’s portfolio is subject to capital gains tax at 33% whereas the Davy Fund (IE00BRJL4881) is a UCITs subject to Exit Tax at a rate of 41%.

After Tax Returns

Risk Adjusted Returns

Again, on a risk adjusted basis, we see our client’s portfolio does a better job (as measured by the Sharpe Ratio) of converting investment risk into returns than the benchmark fund

Bench-Marked Against Dimensional World Allocation 60/40 Fund

(ISIN: IE00B9L4YR86) Launched 30th December 2015

Source: Morningstar

Consistent out performance with greater tax efficiency than the retail investment product.

Warning: the value of your investment may go down as well as up. This service may be affected by changes in currency exchange rates. Past performance is not a reliable guide to future performance. The information above is for education purposes only.