Whilst many advisory firms outsource their investment proposition, we believe in keeping ours in house to ensure our clients' investments and approach to risk remain at the core of all the planning we do and to remove a layer of charges.
We believe that it is important to ascertain your appetite to risk based on;
- your knowledge and experience of investing,
- your tolerance to taking risk,
- your need to take risk and,
- your capacity for loss.
Once we truly understand this we are then well placed to devise a suitable investment strategy for you.
There are three main parts to the process of building an investment portfolio for our clients:
- Select the types of assets that should make up the portfolio by considering your approach to risk, your investment timeframe and the current market conditions. This stage is otherwise known as strategic asset allocation.
- The next step is to position the portfolio based on current market conditions and factors looking for opportunities to maximise returns within the portfolio whilst limiting losses, this is otherwise known as tactical asset allocation.
- The third and final stage is our fund selection process. We use cutting edge technology to analyse every fund in the Investment Association Universe to select what we believe to be the most appropriate funds in each sector to construct our portfolios.
If you would like more detail on these stages then please read on:
Strategic Asset Allocation
The strategic asset allocation provides us with a list of assets appropriate for the various risk profiles and investment timescales. To ascertain this information, we work closely with an external firm, who have developed a model with the University of Cambridge. Many asset allocation models look at historic performance to determine a suitable allocation. However, the one we use also looks to the future, taking current market conditions into account.
There are eight distinct asset classes within this model, these are Cash, Government Bonds, Index Linked Bonds, Corporate Bonds, UK Equities, Developed International Equities, Emerging Equities and Property.
Once we have determined a suitable asset allocation for each particular risk profile and timescale, we then go on to look at how we can map these asset classes to the Investment Association sectors.
Tactical Asset Allocation
At the time of writing there are 40 Investment Association sectors. These include sectors such as UK Equity Income, UK All Companies and UK Smaller Companies which would all be regarded as suitable for the UK Equities asset class listed above.
At our quarterly investment committee meeting, we look at the current market conditions and map each of the Investment Association sectors to the asset classes listed above, across all risk profiles and timescales. As an example; the weighting between UK Equity Income, UK All Companies and UK Smaller Companies sectors for a client’s UK Equities exposure will vary substantially depending on whether you’re a Cautious investor or an Adventurous investor.
Once we have our tactical asset allocation model built we then go on to analyse the funds available within those sectors.
Once we have our chosen Investment Association sectors, we initially use a quantitative filter across all the investment funds available in the UK retail market. This removes several funds from each sector based on our criteria which includes fund size, past performance, risk, manager tenure, and fund launch date. We then analyse the performance of each remaining fund, taking into account the risk the fund has taken to achieve that level of past performance. It is important to understand that the top performing fund is not always the best fund to invest in as they might have taken significant levels of risk to achieve the return.
Once we have our shortlist of preferred funds based on our quantitative filter, we then apply a qualitative approach. Researching each fund further and considering areas such as how the funds manage liquidity, how they are currently positioned in the market place and what type of investors make up the portfolio.
At Harding Financial, we are passionate about looking to make a positive difference to our clients’ lives and the lives of our employees whilst also enhancing and caring for the world we live in. We feel a great deal of responsibility with the money we manage for our clients and so the final overlay to our investment committee’s portfolio selection process is an ethical one. For full details of our approach to ethical investing please read our Environmental Committee page. To summarise, we are members of the UK Sustainable Investment and Finance Association and the Ethical Investment Association. Therefore, where there is the choice between two funds in the same sector offering comparable quantitative data, we will chose the ethically labelled fund.
So now we have our final shortlist of funds, the last step in the process is to build your portfolio! In doing so we consider areas such as maximum exposure levels and diversification across fund houses.
We are looking for your portfolio to have achieved consistent past performance, outperforming its benchmark whilst taking less risk to do so.
It is incredibly important that anyone managing portfolios of investments regularly benchmark themselves against a relevant benchmark to ensure that what they are doing is working and is relevant. Whilst we benchmark ourselves against several indices, the standard benchmark we use is the Sector Weighted Average Benchmark. The Sector Weighted Average Benchmark is a benchmark that is built using the average performance of the Investment Association sector averages, with the same weighting that you hold within your portfolio.
For any further information on our investment process, please do not hesitate to get in touch using the form below.