Systematic, evidence-based investing often results in very little activity in a portfolio. But it's wrong to think that this is the result of a ‘set-and-forget’ strategy.
Considerable effort goes on behind the scenes to allow this state of calm consistency to exist. The fortitude and discipline to deliver the advice that, ‘not much needs to be done to your portfolio except for rebalancing’, comes from a rigorous process of ongoing challenge to the status quo.
Every time you open the valuation statement outlining your portfolio, it's likely to look largely unchanged, both in terms of its structure and the products through which the investment strategy is implemented in practice.
One of these products is likely to catch your eye, as it has not done as well as the others, or the portfolio as a whole is down. It might be tempting to ask, “What are you going to do about it?”.
The answer is probably going to be, “Nothing!”
But by focusing on the work of our Investment Committee, we can soon see that ’nothing’ is usually – but not always - the right answer.
So what does the Committee actually do that looks so simple?
Manage risks over time
The Investment Committee is responsible for the oversight of the risk in portfolios and the wider investment process. Meetings are regular and minutes are taken, which include all action points to be followed up on. Third-party inputs and guest members provide independent insight and challenge.
Challenge the process
The investment process at BRWM is driven by the latest empirical evidence and theory available. It is always open to challenge. If new evidence suggests that doing things differently would be in our clients’ best interests, then we will revise our approach. The investment process is evolutionary, but change is most likely to be slow and incremental.
Review the portfolio structure
The underlying characteristics of our client portfolios are reviewed, including performance and risk level attributes. Risks (asset class exposures) and their allocations within a portfolio are evaluated. Any issues are raised and resolved. Existing asset classes are reviewed alongside asset classes and risk factors that currently sit outside the portfolios. Areas of interest are placed on a longer-term ‘watch’ list.
Review the incumbent ‘best-in-class’ investment products
The incumbent products are ‘best-in-class’ choices seeking to deliver the returns due to investors for taking specific market risks. Each product has a role to play in a portfolio, and its ability to deliver against this objective is regularly reviewed. Any product-related issues are raised and resolved.
Screen for new products and undertake appropriate due diligence
Although the incumbent products were recommended as ‘best-in-class’, new products are regularly being launched. Tough screening criteria are in place, against which new funds are judged. New, potential ‘best-in-class’ products face detailed due diligence and approval. They are included only when they make the grade. Given the quality of the products already in portfolios, the threshold for replacement is high, but not insurmountable for newer products.
Reaffirm or revise the investment process
The Investment Committee is accountable for reaffirming or revising the structure of client portfolios. Risk (asset) allocations and product changes are approved by the Investment Committee. Any actions arising from portfolio revisions will be undertaken, after discussion with and agreement by clients.
The next time you open your latest valuation report, remember that despite the lack of activity on the surface, the Investment Committee continues to paddle furiously behind the scenes to allow this be the case.
In the immortal words of the investment legend and author Charles Ellis:
‘In investing, activity is almost always in surplus.’
Perhaps we should amend this slightly to:
‘In investing, activity is – except for the Investment Committee – almost always in surplus.’