At Sterling and Law it is our view that if a client was to meet with two different advisers and provide them with the same information and objectives the investment advice coming back from the advisers would be very much the same. This is the driving force behind our Central Investment Proposition. It represents the firm’s assessment of the whole of the investment market and provides a shortlist of investment solutions which will be suitable for all our clients’ objectives.
Sterling and Law do not provide a ‘one size fits all’ investment solution but instead we prefer to offer a range of investment solutions to meet the requirements of a diverse client bank with a diverse set of investment objectives.
Sterling and Law’s Investment Committee takes day to day responsibility for managing the firm’s Central Investment Proposition. Each member of the committee has over 20 years of experience in investment advice and with their extensive knowledge of current markets they combine to provide a robust proposition for Sterling and Law advisers.
It is the role of the Investment Committee to carry out appropriate research and due diligence in order to produce a panel of excellent investment solutions. Full research and due diligence is carried out annually but the Investment Committee meet quarterly to review the panel and make changes where necessary.
The Background to Our Approach
From the outset the Investment Committee is looking for investment solutions which can deliver three core requirements: high levels of investment diversification; competitive costing and consistently strong performance.
One of the most important views to arise from modern portfolio theory is that investors should avoid concentrated sources of risk by holding a diversified portfolio. There are three primary factors which influence portfolio performance: asset allocation, stock selection and market timing. Almost 30 years ago, following detailed research into the performance of almost 100 institutional pension funds, it was established that 80% of a portfolio’s performance was determined by its asset allocation, with stock selection and market timing being the main factors responsible for the remaining 20% (“Determinants of Portfolio Performance” – Brinson, Hood and Beebower – 1986).
Diversification of an investment portfolio across a variety of different non-correlated (or ideally negatively correlated) asset classes should help to reduce the overall level of risk compared with, say, a portfolio which only includes equities or bonds. As an example the inclusion of a small investment in a higher risk fund invested in a completely different area, in a portfolio comprised say solely of UK bonds, can actually serve to reduce the overall level of risk in the portfolio when viewed as a whole. This is because the behaviour of the higher risk fund differs to that of UK bonds in how it reacts to varying economic events. Hence an effective combination of different asset classes can significantly reduce the risk of a portfolio without reducing its potential for growth.
In order to achieve consistently strong performance the investment committee also has to weigh the benefits of the active versus passive investment. Active managers would argue that that regular outperformance can only come from skilled stock selection, exploiting pricing anomalies and good market timing whereas the proponents of the passive case would suggest that driving cost out of the portfolio will generate the best returns over the medium to long term. Passive investing actually means tracking one or more market indices without management intervention. Followers of passive management believe in the “efficient market hypothesis” which states that at all times markets incorporate and reflect all information, rendering individual stock picking futile.
At Sterling and Law we are agnostic on the active versus passive debate and by looking at fund performance net of fees we follow a Central Investment Proposition which has a place for both.
Our Due Diligence Process
Identify the Providers of Multi Asset Investment Solutions: These are sourced on an ongoing basis throughout the year through recommendations from investment providers, the investment committee’s own research and the analysis of all such investments through our research software. In most cases we require investments to have at least a 3 year track record before they will be considered for our sue diligence.
Financial Strength: We will not consider investment providers who are new to market and have low levels of funds under management. As a minimum we would require any provider we consider to be managing at least £1billion across its fund range.
Risk Banding: These investment series are then split into our five risk bands according to the volatility of each individual investment portfolio. Volatility is a generally accepted broad measure of risk, although it is not perfect. It is a measure of the irregularities in the performance of a fund or portfolio which serves as a guide (based solely on past performance) to the extent of under or over performance of a fund against its absolute performance. Two funds with the same performance over a given term can have widely differing volatility ratings which can be taken as a measure of the degree of risk each fund manager has taken to achieve the return. Volatility is generally expressed as the standard deviation of monthly total returns over a 36 month period. We currently use FE Scores to measure volatility.
Past Performance: The investment solutions in each risk band are then ranked according to their 3 year performance net of fees.
Charges: We record the Ongoing Charges Figure (OCF) of each investment solution. This is principally the annual management charge but also includes the costs for other services paid for by the fund, such as transaction fees and the fees paid to the trustee, custodian, auditors and registrar.
Final Overview: Performance data and charging information are aggregated for each fund. The investment committee will also take note of FE Crown Ratings which identify funds which have displayed superior performance in terms of stock-picking, consistency and risk control. As a firm we like to use a small number of investment ranges which are strong across the risk scale and so the investment committee are especially interested in those providers who can provide consistently strong returns at all levels of risk.