Ongoing Investment Governance
“The most treasured asset in investment management is a steady hand at the tiller.”
Robert Arnott – Founder and CEO Research Affiliates
Clients of Wells Gibson adopt a systematic, buy-hold-rebalance approach to investing. As a client of Wells Gibson, it might be tempting to question why your portfolio seems to be largely unchanged from one period to the next. Therefore, it’s probably worthwhile summarising what we do.
Wear a risk manager’s hat, not a performance manager’s hat…
A good place to start is to look at our investment process, not from a performance perspective, as most stock brokers and investment managers tend to do, but from a risk perspective. Performance-focused managers inevitably look busy as they regularly change portfolio allocations and fund holdings. However, more activity does not mean better outcomes and plenty of evidence exists to back this up. Those who focus on chasing returns are susceptible to taking unknown or poorly understood risks and getting it wrong. They also incur higher costs.
On the other hand, focusing on taking risks that are fully understood and adequately rewarded, offers clients of Wells Gibson every chance of a successful investment outcome. As a client of Wells Gibson, your portfolio should provide you with the comfort that it is robust under the wide range of testing scenarios that could be thrown at it by capital markets.
Let’s consider some of the key risk decisions that are made when establishing your portfolio with Wells Gibson:
- Own shorter-dated, higher quality bonds to balance equity downside risk. Chasing higher yields in bonds simply dilutes their defensive qualities and the lower the credit quality, the more these bonds act like equities / shares;
- Own a highly-diversified pool of global companies to avoid concentration risks and capture the broad returns of capitalism;
- Tilt the portfolio towards higher risks, such as value (less financially healthy) and smaller companies to pick up incrementally higher returns;
- Use systematic rather than judgemental and speculative fund managers. Although choosing a manager who promises to beat the market sounds appealing, the stark reality is that true skill is hard to discern from luck, it is extremely rare, and it is almost impossible to identify in advance. Employing managers who capture the returns delivered by taking on specific market risks, makes good sense; and
- Rebalance regularly to avoid owning an increasingly risky portfolio. Over time, the riskier assets (equities / shares) in a portfolio tend to rise in value and begin to overpower the more defensive assets (bonds) in your portfolio. Periodically realigning – or rebalancing – your portfolio back to its original structure avoids this risk.
The role of the Wells Gibson Investment Committee
The Wells Gibson Investment Committee is responsible for the oversight of the above risks in their client portfolios and the wider investment process. Meetings are held regularly and minutes are taken, which include all action points to be followed up on. Third-party inputs and guest members provide valuable independent insight, where necessary. Its responsibilities include:
- Ongoing challenge to the process. If new evidence suggests that doing things differently would be in our clients’ best interests, Wells Gibson will revise its approach. The investment process is evolutionary, but change is most likely to be rare and incremental;
- Review of the best-in-class funds recommended. Each fund has a role to play in a portfolio and its ability to deliver against this objective is regularly reviewed. Any fund-related issues are raised and resolved, although this is rare;
- Review the portfolio structure. Risks (asset class exposures) and their allocations within your portfolio are evaluated and from time to time these may change as our thinking evolves, based on the latest evidence;
- Screen for new funds. New, potential best-in-class funds face detailed due diligence and approval, before they are recommended to clients of Wells Gibson. It would take a material improvement to knock an incumbent fund off its perch, but it can and does happen from time to time; and
- Reaffirm or revise the investment process. Risk (asset) allocations and fund changes are approved by the Wells Gibson Investment Committee. Any actions arising from portfolio revisions will be undertaken, after discussion with, and agreement with our clients.
It is entirely possible, and likely, that your Wells Gibson portfolio will look much the same between one time-period and the next and with little activity, except for rebalancing. However, that does not mean that nothing is happening. In fact, it takes quite a lot of work to keep our portfolios the same.