As systematic investors, we seek to continually challenge the process in order to maintain a solution which we feel gives us the best ability to meet our lifestyle and financial goals.  We understand that trying to predict the time and direction of market movements over shorter time periods is a fool’s pursuit. Any change in portfolio structure or investment approach, therefore, must be guided by a change in the evidence or our investment goals.

The interest rates set by central banks have been rising around much of the world in recent times. One will have done well to avoid such headlines in the news. 
In the UK, the base rate set by the Bank of England was just 0.1% three years ago and now sits at 5.25%, at time of writing. 
This considerable increase, much of which happened in 2022, led to historically low returns on bonds, as bonds fell in price in order to align with rising market yields. 
Despite rates not having been at such levels for some time, it is not uncharted territory. 
In fact, since 1975 rates have been above current levels more than half of the time.
For investors with medium to longer term liabilities, i.e. 5 to 10 years and beyond), these rate rises, and corresponding price falls, have significant benefits. 

Given the structure of portfolios, the - now higher yielding – bonds should get through the price falls experienced and thereafter be enjoying a higher return. It also opens up other options for savers – annuity rates and fixed term instruments now become more viable, in some circumstances. However, when it comes to the expected returns on portfolios, the evidence remains the same. We can look at historical figures to give an insight into whether there is a relationship between current rates on cash and subsequent portfolio returns.

Historical data reveals at a given level of starting interest rate, the proportion of times in the subsequent year, that the investment portfolio outperformed this starting cash rate. In essence, this is seeking to answer the question: ‘if I lock up my cash today for the next twelve months I am guaranteed x%, so why take on the additional risk of investing in a portfolio?’. 

Well, our research reveals that between January 1970 and June 2023, the proportion of periods that a 60% equity portfolio outperformed cash in the subsequent year were higher than 50%.  There is no clear relationship between the level of cash rates and subsequent outcome of portfolio returns relative to cash. Over all 1-year periods in our sample, the 60% equity portfolio outperformed locked up cash in 2/3rds of observations. The average excess return of the portfolio over cash in the 1-year periods was 4%. As we extend the holding period of our portfolio to 5- and 10-years the proportion of outperforming periods rises to over 80%. Other practical implications are worth considering. 

Locking up cash reduces liquidity, and may only be withdrawable outside of the agreed period with a significant penalty. 

Also, savers with larger sums of cash need to be wise and spread cash across banking groups to remain under FSCS protection limits. Bank failures in the US this year offer a cautious reminder to savers not to naively ignore protection limits.
In closing, risk and return remain inextricably linked.  The baseline has increased for all asset classes so please stick with the program. 

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Readers of the Sunday papers’ financial pages will be familiar with the dividend chasing stories that pundits and some fund managers love to peddle.
These generally focus on high dividend paying shares or ‘income’ funds that focus on these shares.
The thought that one can take an income from a portfolio without the need to sell shares can feel appealing to some. But dig a little deeper and it quickly becomes evident that a portfolio constructed from a bottom up dividend-driven approach is unlikely to be the most optimal approach and contain risks that may not be fully appreciated.

The first point to note is that you cannot have your cake and eat it!
If a company pays out a high dividend, that money cannot be reinvested by the firm to deliver higher future earnings which in turn drives share prices - in other words, the present value of future cashflows of a company.
So, with higher dividends today, you forgo tomorrow’s price growth.
In theory, the dividend policy of a firm should make little difference to its total return (by total return we mean, dividends plus share price appreciation) .

The second point to note is that different sectors of the economy tend to have different average dividend payout strategies.
For example, tech companies tend to reinvest most of their cash flows into product development and attaining greater market share, whilst energy companies – operating in a more mature industry - may not be able to find projects in excess of their cost of capital and may return money to shareholders via dividends.
Chasing dividends tends to end up in large sector ‘bets’ away from the market.

The third point to note is that because each equity market reflects the companies listed on it, large sector differences do exist between markets.
For example, the UK has materially less exposure to technology companies compared to the US but higher weightings to energy companies.
As a consequence, the UK market has a higher dividend yield than the US market.
A dividend-driven approach will likely overweight the UK (and other higher yielding markets) relative to other lower-yielding markets.
If we look at the average dividend yield of the 10 largest global markets by size between 2015 and 2023, we can see that Switzerland leads the way, followed by Australia and then the UK.

The final points worth noting are: within each market, dividend payments are often concentrated in just a few shares resulting in share concentration risks; and higher dividends tend to describe value companies which are less healthy companies with higher expected returns, potentially inadvertently skewing a portfolio towards higher expected risks.
If you have bonds in your portfolio, chasing higher yields from lower quality bonds or lower quality borrowers), this simply adds equity-like risk to your portfolio.
The higher the yield, the riskier the borrower. But that story is for another day!
An eminently sensible alternative approach to taking income from a portfolio is to think on a ‘total return’ basis where an investor is agnostic to taking dividends or selling shares to deliver the capital required.
This is the way that pension plans and endowments tend to draw income.
It allows you as an investor to maintain the structural integrity of their portfolio and to avoid company, sector and market bets in the pursuit of higher dividend yields on portfolios.
My advice is, don’t cha

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For many investors a propensity to place too much weight on recent events in terms of what the future may look like is quite common. This is known a ‘recency bias’ and it is this, we regards as the scourge of investors.

Charles Schwab, a major US broker, sponsored some research on its own client base to identify which behavioural biases predominate in their clients and recency bias was the one most commonly exhibited.

Around 50% to 60% of all investors appear to suffer from recency bias, and the number is even higher for younger investors.

Some investors may include global commercial property such as shopping malls, offices, industrial buildings, logistics hubs and data centres, in the growth assets portion of their portfolios to provide a bit of diversification to their pure equity exposures.
It is not guaranteed to work all the time but can be beneficial at times. The logic and empirical data certainly supports a reasonable case for including global commercial property.
Yet, of late, global commercial property has been under pressure on account of lifestyle and work-pattern changes.

Add in rapidly rising interest rates and the ‘story’ sounds quite bleak - in 2022, global commerical property, as an asset class was down by around -14%, whilst the UK equity market was up by about +7%.
And, global commercial property is down again in 2023.
Many investors might be tempted to consider abandoning it as an asset class, because they believe the future ‘obviously’ looks bleak, and its recent run of poor performance is thus likely to persist.
Yet, doing this would ignore a central tenet of systematic investing that all this doom and gloom is already reflected in market prices for global commercial property - in other words, it might go higher or lower from here, not because of what has recently happened but what new information the market receives.

Every asset class has its bad and good periods yet global commerical property has been the most consistent when compared to Developed and Emerging Market equities over the past 20 years or so!
Abandoning or adding to a portfolio simply by extrapolating what has recently done well or badly is not a great strategy.

In 2022, commodity futures were the star asset class, returning around +30% in a year when bonds and equities were down in value. In 2023 they are down in value by around -15%.
And, when gold rises in price, investors’ are always curious.
As investors, we should never fall into the trap of thinking that the recent past points us to future outcomes.
Furthermore, we should never fall into the trap of thinking that a winning investment strategy is to pick what has just done well and avoid what has just done badly - follow this path is highly likely to result in great disappointment.

In closing, let's reflect on these wise words written by Charles D. Ellis in his excellent 2002 book Winning the Loser’s Game (Ellis, 2002):
‘The hardest work in investing is not intellectual, it’s emotional. Being rational in an emotional environment is not easy. The hardest work is not figuring out the optimal investment policy; it’s sustaining a long-term focus at market highs or market lows and staying committed to a sound investment policy. Holding on to sound investment policy at market highs and market lows in notoriously hard and important work, particularly when Mr. Market always tries to trick you into making change

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Isn't it true that modern society loves a ‘star rating’?

Most of us know what to expect if we book a 5-star hotel stay for a business trip when compared to a 3-star bed-and-breakfast for a weekend away.

The investment field is no different, with many institutions offering their own spin on star ratings and how to calculate them.

However, unlike the hotel industry, I would suggest many of the rating systems that assess the funds used by investors are best ignored.

Let's investigate why this might be the case…

A quick Google of a fund name will most likely return links to some of the major data providers out there such as Trustnet, Morningstar, and The Financial Times. For instance, I recently came across a UK Equity Fund that is currently rated as 5 Crowns on Trustnet through a system calculated by Financial Express - I won't however mention the fund as I wouldn't want anyone to consider this as a recommendation!

On these pages one might find star ratings, or similar, implying the relative quality of a product.

But, the challenge with these types of ratings is that the focus is solely on recent, short-term performance as opposed to long-term, sensible structure.

Without getting too granular, the Crown Ratings are derived using 3-year performance and volatility - in other words, how much the performance moves up and down compared to a benchmark, such as the FTSE 100 Index aka the Footsie 100 Index.

The thing is, 3-years is not nearly enough time, nor the sole use of performance figures insightful enough, to properly test the efficacy of a fund’s strategy or test the ability of the fund manager to pick shares or time markets.

In any case, remeber that picking shares and timing the markets is not a game played by sensible, systematic investors!

Reviewing a track record of 20-years would be statistically more prudent, however, to have benefited as an investor one would have had to identify the investment in advance which is nigh-impossible.

As Frederick the Great once said, "A crown is merely a hat that lets the rain in"!

At Wells Gibson, we believe strongly that structuring portfolios based on ratings that are derived with hindsight goggles is a dangerous game.

However, sadly, there are many investors out there that do pay attention to these ratings and are engaged in a repetitive cycle of buying-high and selling-low.

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Are Balanced Portfolios dead?

Legend has it that in 1895 whilst in London, Mark Twain, who had been feeling a little poorly, on discovering that a journalist had written his obituary, quipped the following:
‘The reports of my death are greatly exaggerated’.
In the past few years, obituaries for a traditional ‘balanced’ portfolio of, say, 60% equity, 40% bonds have been written by quite a number of financial journalists and fund managers.
At Wells Gibson, we believe such a portfolio continues to be alive and kicking.
Good investing is grounded in three things:
1. Using investment logic to think clearly about what one puts into a portfolio;
2. Using empirical insights to inform us of the general longer-term characteristics of assets and how they work together in a portfolio, and the shorter-term exceptions to these generalities; and
3. The fortitude to stick with a sensible portfolio strategy through these shorter-term, trying periods.
A portfolio mix of bonds and equities balances the potentially severe downside falls in equity markets by owning far less volatile, good quality bonds that will not fall as far, if they do fall at all.
There is a general expectation that at times of severe equity market trauma, fearful money will move into high quality bonds pushing yields down and bond prices up - in other words, there is a see-saw effect between yields and prices - that is often but not always the case, as 2022 and 1994 demonstrated.
It is certainly fair to say that the past five-year period has been tough for 60/40 balanced portfolios, given that it included the global pandemic, the war in Ukraine, a rapid end to the era of low nominal and negative real interest rates, the highest inflation in 40 years in the UK, and a downturn in global equity markets in 2022.
Even so, it delivered a return that more-or-less matched inflation over this period, which should be regarded as a good outcome.
Furthermore, if we look at annualised, rolling real returns (after inflation) since 1970, for different investment horizons, we learn that the 60/40 structure has delivered growth of purchasing power in the vast majority of five-year horizons (and beyond). The longer one holds, the more consistent returns become.

The reports of the death of balanced portfolios are greatly exaggerated. Balanced portfolios are not dead and at Wells Gibson, we are sure Mark Twain would agree.
Note that this is not to suggest that a balanced portfolio is suitable for any specific investor. The decision as to what is suitable will be the result of an informed discussion between an investor and their adviser. This is not a recommendation.

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In today's episode, we're going to consider the subject being a formula for success. But before we look at, that, thank you again to all of our listeners who tune into the Purposeful Wealth podcast. I've made apologies before that the recordings haven't been maybe as frequent as we would have liked, and the library hasn't been updated. That's just largely been due to the other competing factors, such as family and business, and perhaps also the good weather we've had of late and being able to enjoy, a walk around the golf course. Can't say that it's been great rounds of golf, but it's certainly a good walk, if nothing else. But we can blame the weather for that, too. But, today we're going to consider a formula for success and really want to just talk about the fact that combining, an enduring investment philosophy with, a simple formula that helps maintain investment discipline can increase the ODS of having a positive financial experience. So, if you want to increase the odds of having a positive financial experience, it's important to ensure you start with, an enduring, robust investment philosophy with a simple formula that helps maintain our discipline as an investor. David Booth, the founder and chairman of the American Fund Manager Dimensional Fund Advisors, once said, the important thing about an investment philosophy is that you have one you can stick with. So I would agree with that, 100% entirely. However, what is an enduring investment philosophy? Investing, as you know, should be and is a long term endeavor. Indeed, people will spend decades pursuing their financial goals. But being an investor, as you know, can be complicated, challenging, frustrating, and sometimes frightening. This is exactly why, as David Booth says, it is important to have an investment philosophy you can stick with, one that can help you stay the course. This simple idea highlights an important question how can we, as investors, maintain discipline? Through optimistic markets or bull markets, the pessimistic markets or the bear markets? Political strife, economic instability, or whatever crisis of the day threatens progress towards our investment goals. Over our lifetimes, us. Investors face many decisions prompted by events that are both within and outside our control. So, without an enduring investment philosophy to help inform our choices, we can potentially suffer unnecessary anxiety, which then leads to poor decisions and outcomes that, of course, are damaging to our long term financial well being when we don't get the results we want. It's true that investors, or us, as investors, can blame things outside of our control. Investors might point the finger at the government or central banks or markets or the economy. Unfortunately, the majority will not do the things that might be more beneficial such as evaluating and reflecting on their own responses to events and ultimately taking responsibility for their decisions. Some people suggest that among the characteristics that separate highly successful people from the rest of us is a focus on influencing outcomes by controlling one's response or reaction to events rather than the events themselves. And this relationship can be described using a simple formula. And it is this this formula, I love this. The E plus R equals O.
So the E is the event, the R is response and the O is outcome. So the event plus response equals the outcome. 

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Welcome to The Purposeful Wealth Podcast and this episode on how a systematic approach to investing provides the best chance of experiencing a successful investing journey - 'Don’t just take our word for it!'

Sticking to some key guiding principles – which are grounded in evidence and logic – gives investors a solid foundation on which to build a sensible investment solution. This short note provides an insight into five of our favourite insights from experienced and accomplished academics and practitioners and explains how these words help us plant our investment philosophical flag in sensible space.

1. A focus on risk management, rather than chasing performance

Quote by Warren Buffet, Berkshire Hathaway 1994 Annual Meeting
‘You don’t find out who’s been swimming naked until the tide goes out.’

The financial media enjoys reporting on top performing fund managers. Humans like exciting stories. Good investing, however, should – to most - seem relatively boring through taking a ‘risk-first’ approach. Ultimately, sensibly considered risks should be rewarded appropriately over time. The risk management process involves deciding which risks one wants to be exposed to in portfolios (such as broad global equity market risk) and which we do not (such as the use of leverage). Managing these risks tightly over time and monitoring them on a regular basis is key.

2. Be diligent and act rationally, with due patience

Quote by Charles D. Ellis, Winning the Losers Game, 1993
‘Activity in investing is almost always in surplus.’

Ensuring any decision made is free from an emotional reaction is a must. Many are prone to making knee-jerk – and sometimes permanently damaging - investment decisions. Taking steps to avoid this is well-advised.

3. Take part and believe in capital markets

Quote by Eugene Fama, Nobel laureate, speaking with The Rational Reminder Podcast, May 2020
‘You’ve got to talk yourself out of the market portfolio.’

Owning a share of companies through investing in capital markets is an effective way for investors to grow their wealth over time. Owning a little bit of everything is not a bad place to start. Luckily for investors these days, one can do so with relative ease through investing in mutual funds. Doing so enables investors to participate in the growth of listed companies from around the world in a diversified manner, avoiding being overly concentrated in a single stock.

4. Keep costs low

Quote by John C. Bogle, Founder of The Vanguard Group, February 2005
‘In Investing, You Get What You Don’t Pay For.’

Cost is by no means the only factor separating better and worse investment solutions, but it is a significant one. Costs can be implicit (e.g. frictional trading costs) or explicit (e.g. fund manager fees). Clearly, any saving made by an investor is retained in the portfolio, rather than being passed off to another party in the process.

5. Stick to the plan

Quote by David F. Swensen, author and former CIO of Yale University endowment, 2005
‘Real-world application of fundamental investment principles produces superior outcomes.’

An investor who can recall their key investment principles stands in good stead to avoid making mistakes. Abiding by some simple guidelines – such as those outlined by the investment mavens in this note – enables investors to employ a robust and repeatable pr

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So, today's topic on looking at home bias and global diversification. I think it's fair to say that every day we enjoy the benefits of an interconnected world. We may well start our day with, a cup of coffee that originated in South America. We check our email on our smartphone, which has been designed in California and manufactured in Taiwan, and then we dress and clothes woven from Egyptian fabrics before driving our American made Tesla or German made BMW, or riding in a French built train to work. And as consumers, we rarely think twice about the benefits that we have from access to such a, wide variety of goods that the global market has to offer. And yet, many investors will often concentrate their portfolios in favor of their home market at the expense of global diversification. For example, while UK equity markets represent around 4% of the value of global equity markets, many UK investors tend to allocate around a third of their equity assets to domestic equities. And this phenomenon, which can be observed across other countries around the world, is known in the investment community as home country bias. 
Given that certain frictions may be associated with investing abroad, a home country bias might make sense for an investor in certain cases. However, in general, neglecting the benefits that global diversification has to offer may increase risks and greatly reduce the investment opportunity set. There's been many charts and graphs that reveal that between, for instance, even looking at, period 2002 to 2021, that twelve different developed countries out of 22 had the best performing equity market in a given calendar year, but yet no country had the best performing market for more than two consecutive years. And this trend was also observed in emerging markets, whereby 14 different emerging market countries out of 20 had ah, the best performing market in a given year and once again, no country had the best performing market in two consecutive years. In other words, the data shows that it is difficult to know which markets will outperform, from year to year and we see that also at company level, at sector level too. So by holding a globally diversified portfolio, investors such as clients of Wells Gibson are instead well positioned to capture the returns wherever they occur. And clearly, attempting to pick only winning markets in any given period is ah, a challenging proposition. By pursuing a globally diversified approach to investing, one doesn't have to attempt to pick winners to achieve a rewarding and perhaps successful investment experience. So by expanding the investment opportunity set beyond your domestic equity market, as an investor you can really help increase the reliability of outcomes. In other words, investors can be confident that, a globally diversified portfolio will hold the best and worst, of course, performing countries each year. But the key thing is that by holding a diversified portfolio you are more than likely going to capture the returns that the market gives. And what that means probably, is, over time that your portfolio should give you a return above inflation, which really is something we all need to be aware of increasingly. 

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