7th February 2013
So that’s how you do it?
We hear often about adviser firms looking at risk rated portfolio building and this adviser insight of how it takes place may be of interest to many.
Derek, as discussed we hold our Investment Committee meetings every quarter to review our 5 risk rated model portfolios.
We are very much champions of modern portfolio theory.
The process starts off by considering all the eligible funds (typically unit trusts/oeic’s, ETF’s and investment trusts) for each asset class.
We initially use Analytics to whittle the list down to a manageable choice of good performing funds using criteria such as fund performance greater than the benchmark over 3 years, fund size greater than £50M, fund running for for at least 3 years, fund manager in situ for at least 12 months and OBSR rating.
Typically we end up at this point with around 6 – 20 funds in each asset class.
This is the starting point for the Investment Committee, we then use measurements such as Alpha, Beta, Sharp, Volatility, Information Ratio and 12 months performance to select the fund(s) in each asset class.
The funds selected are then used in our portfolios for the next quarter.
Although It is very process driven we do add a little bit of adviser experience and knowledge of particular markets when making the final decisions.
An example of this would be the Invesco Perpetual High Income fund which has been lagging from a performance perspective and, based on alpha etc would not normally be selected, however because of Neil Woodford’s long term track record we have used this fund in our portfolios.
We are then guided by an asset allocation model provided by Ibbotsons to construct our portfolios.
Typically we usually change on average 2 funds per quarter. We have selected 20 funds for Q1with the middle 3 risk rated funds having the same funds with different weightings. The Defensive and Aggressive portfolios will usually drop a couple of the highest and least volatile funds respectively.
The final part of the process is to sense check each portfolio in a graph using volatility and performance to hopefully produce an efficient frontier.
Many thanks to Rab Shields DipPFS at Simple Solutions Financial Management Ltd for the insight.
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