Wise Investments Ltd, Investment Management and Financial Planning.
Achieving The Objective
At the beginning of a new year it is often the time to make predictions and to look back and review the last 12 months.
Investors like predictions but they usually turn out to be of little value as unforeseen events have a large impact. Of course some things are easier to predict and I think I can confidently say that the first half of 2012 will see a very low level of economic growth in developed markets and interest rates look set to remain low for a considerable period. Equities are cheap on an historic basis whilst UK government bonds look very expensive but this does not give us a great clue to where they will go in the short term.
Sentiment towards equities has until recently been very negative but there are signs that this is improving. Some shares have performed well, these tend to be ones in stable businesses, with low debts and offer clear visibility. However a number of these offer very attractive dividend yields. Others shares have suffered. Among the worst performers have been Banks due to the Eurozone crisis, retailers due to rising unemployment and pressure on family budgets, Miners due to concerns of potential economic slow down in China and Insurance companies whose investment portfolio’s have seen large losses.
Falls in many cases have been overdone and when the outlook eventually improves we will see some large price rises.
UK Government Bonds on the other hand look expensive. This is good for the British Government as investors are happy to earn less than 2% per annum for a 10 year loan to them. With inflation still well over 4% and such a long timescale it seems crazy that investors see this as an attractive opportunity. At some point safety will be of less concern and investors will sell to invest in more attractive assets.
When looking at investment performance there are three main points investors look at:
- Absolute returns
- Relative returns – how did the investment do compared to similar ones
- Objective achievement – over the longer term is the investment managing to achieve what it set out to do
At Wise, I have the responsibility for five different investments. TB Wise Strategic is the largest of these but I also manage four Portfolios. All of these have different objectives and are all primarily invested in Open Ended Investment Funds.
Wise Strategic
This has been a difficult year with an excessive amount of ‘Market noise’. The markets have been fixated with the ‘latest’ news which has often caused daily swings in sentiment creating much market volatility and leading to what has become known as the Risk On / Risk Off trade. One day positively interpreted news has been good for riskier assets such as equities so these have risen in value whilst at the same time investors have sold safer assets such as UK Government Bonds. The next day due to some more worrying data investors have looked for safety, doing the opposite, buying Government Bonds and selling equities.
Over the year there has been much to worry about including uprisings in Arab countries, the US Budget deficit, Eurozone crisis and growth slowing down in China. In addition the Fund took a knock in March after the catastrophic Tsunami hit Japan and had a severe effect on the Japanese Economy.
The Fund primarily invests in equities to achieve long term growth although it can invest in other assets should they be considered appropriate. The objective of the Fund is ‘to provide capital growth over the medium to longer term in excess of deposit account returns and inflation’. Over the year the Fund fell 7.62% which is disappointing when the average 90 day deposit account rose 1.15% and inflation was 4.8% (KPI).
However whilst I would like to have done better it has be measured in context. The average fund in the Flexible Managed Sector fell 8.88% so the Fund outperformed the majority of its peers and has now in fact done so in each of the last three calendar years an achievement only managed by nine other funds out of 114 in the Flexible Managed Sector. In fact over the longer term, 3 years, the Fund has returned 35.8% which compares to 29.53% from the average of the Flexible Managed Sector. In addition this has been achieved with a lower volatility (risk) than the sector average. Inflation over this period was 12.4% (RPI).
In addition to the Wise Strategic Fund I also manage four Wise Portfolios, each of which has a different objective. I am pleased to report that all of these Portfolios have outperformed their benchmarks over the last three years.
Each Portfolio is a selection of seven funds with the three that I have most conviction in having a 20% allocation and the remaining four having 10% allocations. The Portfolios are reviewed on a quarterly basis.
Wise Adventurous Portfolio (Higher Risk)
The objective of this Portfolio is to produce a high level of capital growth through a diversified Portfolio of investment funds.
Whilst this is a higher risk Portfolio I manage it in such a way that overall risk is reduced by investing in diverse sectors. Furthermore I am always looking for interesting opportunities so there may be more turnover in this Portfolio. In particular I will look for funds in sectors that might be out of favour and as a result will register large gains when sentiment turns more positive. The Portfolios will consist mainly of a single country and specialist sector funds. I will always try to reduce overall risk whilst each fund on its own will probably be High risk. Current holdings include funds invested in Russia, Japan, Technology, Healthcare and Gold Mining Shares.
Over the year in line with most ‘risk’ assets performance has been disappointing with a fall of 9.27% although this is still better than it benchmark the IMA Global Sector which fell 9.45%. Over three years the returns are much better at 37.63% compared to 29.16% from the IMA Global Sector.
Wise Growth Portfolio (Medium Risk)
The objective of this Portfolio is to produce capital growth through a diversified Portfolio of Investment funds. It will contain funds managed in different styles and regions but will aim to maximise the return for a UK investor.
This Portfolio will have a higher proportion of UK funds which reduces currency risk. The funds held will generally be invested in growth companies. Funds will be those which have consistent long term track records. From time to time there will be a bias towards more defensive shares and in extreme circumstances other asset classes may be held to preserve capital. Over the longer term the Portfolio will have a bias to sectors and regions that offer the best long term growth opportunities.
Over the last year the Portfolio has fallen 7.82% which compares to a fall of 8.24% from its benchmark (50% IMA Global Sector / 50% IMA UK All Companies Sector). Over three years the Portfolio has risen 40.86% compared to 35.81% by its benchmark.
Wise Growth and Income Portfolio (Medium Risk)
The objective of this Portfolio is to produce capital and income coupled to a rising capital value over the medium to longer term.
This Portfolio is primarily invested in funds that aim to generate a rising income by investing in equities. At times other assets may be owned to protect the Portfolio from large capital losses. The Portfolio will be made up of a mixture of overseas and UK funds with the weighting adjusted depending on relative valuations and also currency outlooks. At times the funds held may be more defensive particularly if the economic outlook is poor. At other times funds targeting a higher level of growth will be utilised. In this Portfolio in particular I am looking for funds that have shown a consistent long term track record of both capital growth and increasing dividends annually. The Portfolio does not specifically look for funds offering the highest yields but those with above average yield offering a good total return.
Over the year this Portfolio has risen 1.37% which compares very well with its benchmark, IMA UK Equity Income Sector, which fell 2.19%. Over three years the Portfolio has risen 41.12% compared to the benchmark which is up 36.7%. If the return is broken down for those taking income who would have seen their capital grow 26.6%. The income reinvested returned a further 14.52%.
The current yield of the Portfolio is 4.35%.
Wise Higher Income Portfolio (Lower Risk)
The objective of this Portfolio is to achieve a higher income than could be achieved by investing in a high yielding equity income Portfolio, along with some capital growth over the longer term.
The Portfolio will invest in a diverse range of funds investing in different asset classes to reduce risk. Whilst generating income is important, the Portfolio will also try to preserve capital over the shorter term and generate some capital growth over the longer term.
The Portfolio will never invest more than 40% in equity funds and may at other times have no equity holdings. Other holdings such as Gilts, Corporate Bonds, High Yield Bonds and Commercial Property will be used to provide diversification and reduce risk to capital. Currently however I see equities as an attractive asset class for this type of investment and have therefore taken a maximum position in these.
Over the last year the fund return was flat (-0.02%) whereas the funds new benchmark, IMA Mixed Investment (20-60% shares) fell 1.89%. Over three years the fund has increased 34.67%, significantly more than its benchmark which is up 23.44%.
David Stephenson
January 2012
Please note, these views represent the personal opinions of David Stephenson as at 23 January 2012 and do not constitute investment advice.
All performance data: Source Financial Express 31/12/11
TB Wise Strategic data refers to A Shares