Don’t come a cropper with investments

Past performance alone is no indicator of future outcomes. Dr Benjamin Holdsworth reveals why controlling structure and risk is more important.

When building an investment portfolio at Cavendish, we employ a focus based on risk rather than on performance. Taking on sensible risks should be rewarded appropriately. 

We concentrate on the things we can control: portfolio structure – for example, country and sector exposures, stock concentrations, product costs and avoiding exposure to specific risks such as counterparty or leverage. 

We accept that there are things we cannot control such as short-term portfolio performance as a result of movements in equity markets due to the never-ending release of new information.

Outcome-focused approach 

Many investors will try, and generally fail, to control this either by themselves or by selecting fund managers they believe can do so. For most, this outcome-focused approach to investing is not where success lies.

An important part of the process when building your portfolios is searching, or ‘screening’, for potentially suitable products to capture market returns. 

We review a universe of tens of thousands of possibly suitable products to get down to one solution to capture specific market exposures in the portfolio. This is no mean feat and requires a comprehensive and rigorous process.

Taking a major part of our portfolios such as developed equities as an example, we look to find investments that can capture the returns of these markets and do so effectively through time. 

Screening process

Our screening process considers a wide array of datapoints, none of which measure performance, to filter down to the solution we use in our portfolios. To focus on fund longevity – thus mitigating the risk of the fund closing – we look for funds of a sufficient size and age. 

To ensure the solution holds an exposure to the developed equity market, we look through the fund to see where the underlying stocks are listed and verify this matches the structure of the market we are looking to capture. 

We screen out investments with higher charges, those with insufficient diversification and those lacking in transparency. 

The result of this risk-focused, rather than outcome-focused, approach is that we are left with a high-quality short list of ‘on watch’ investments.

Manager’s philosopy

For the final step in the selection process, we consider the fund manager’s philosophy and approach, as well as any data that sets the investment apart on this competitive watch list. 

When reviewing the competitors that make up the watch list, we see that their past performance is in fact strong relative to other participants in the industry. 

Despite not screening on performance, and instead focusing on process, we end up with a list of investments that have performed strongly because of their sound structure, placing them predominantly in the top quartile of all managers in the same category, particularly over the longer term. 

What is more, this entire process is repeated at least annually. In this way, investors can have every confidence that their portfolio comprises high-quality investment products as a result of a screening process which is not outcome-focused, but risk-focused. This gives the investor every opportunity to achieve strong outcomes going forward.

Dr Benjamin Holdsworth (right) is a director of Cavendish Medical, specialist financial planners helping consultants in private practice and the NHS

The content of this article is for information only and must not be considered as financial advice. Cavendish Medical always recommends that you seek independent financial advice before making any financial decisions.
Levels, bases of and reliefs from taxation may be subject to change and their value depends on the individual circumstances of the investor. The value of investments and the income from them can fluctuate and investors may get back less than the amount invested.