• Investments are a means to achieving objectives and life goals and not an end in themselves.
   
• Goals have different timescales and a different degree of importance in terms of achievement.
   
• Importance and timescale, and client’s individual approach to investment risk will then help to identify the appropriate investment mix for each goal.
   
• Assets are segregated into separate investment pools aligned to specific goals to give the best chance of achieving those goals.
   
• Select the best ‘tax wrapper’ to create the most efficient tax environment; always focusing on the importance and timescale of the achievement of the objective.
   
• In order to ensure that a coherent investment mix can be established and maintained investments should, where appropriate, be brought onto a common platform.

Selecting An Investment Mix

• Research shows that over 90% of a portfolio’s return is derived from overall asset allocation (proportion in shares, gilts, property etc) rather than stock selection or market timing.
   
• A passive approach is where investment is made in ‘index tracking’ funds. These have significantly lower charges and are not subject to the influence or additional costs of fund managers.
   
• A key part of the overall investment strategy is to rebalance the portfolio at the end of each year to return it to its original asset mix.
   
• This rebalancing is the opposite of most ‘herd’ investment approach (sell low buy high) and leads to enhanced long term returns as well as maintaining the originally agreed degree of volatility.
   
• For non core holdings where client's risk tolerance is greater we are happy to discuss active management on a client by client basis.
   

Asset Allocation Models

• Based on the importance, timescale and degree of risk being taken to achieve the objectives we will use one of the following 7 investment models to asset allocate investment funds.
  
  To view the investment models, please click the image on the right.

• We will review with clients the performance of the investments allocated to ‘pools’ against the required rate of return each year.
   
• Importantly clients will know what progress they are making towards the achievement of their goals and objectives.
   
• We will make any changes we feel are required while there is still time to act.
   
• Should a client experience a specific life event that necessitates a review of investment strategy this can be done at any time.

• Grierson Dickens Investment Philosophy is based on long standing scientific research. The key elements are diversification, adopting an asset allocation appropriate for the timescale and your risk profile, and using passive index tracking investments to minimise cost and remove fund manager influence.
   
• Here we examine in more depth each of these factors.

Asset Allocation

• Widely accepted scientific research shows that over 90% of a portfolio’s return is derived from overall asset allocation (proportion in shares, gilts, property etc) rather than stock selection or market timing, which rarely have a positive net effect on investment return. Different asset allocation mixes represent different levels of risk. Generally higher equity content will lead to higher volatility but higher long term returns. Therefore for a given individual’s risk profile, and the timescale for an investment, there will be an appropriate asset mix. A key part of the overall investment strategy is to rebalance the portfolio at the end of each year to return it to its original asset mix. This is done by selling some of the better performing investments and buying some of the underperforming investments. This rebalancing is the opposite of most ‘herd’ investment approach (sell low buy high) and leads to enhanced long term returns as well as maintaining the originally agreed degree of volatility.

Diversification

• Investing in individual shares carries not only systematic risk (i.e. that shares generally may fall) but also specific risk (the company you have selected may fail due to reasons specific to its own business model and not the market as a whole). This latter risk is virtually eliminated by investing in a basket of as many companies on a given asset type as possible. Therefore instead of individual shares we will invest in funds which are representative of a broad diversified spread of companies in the asset relevant asset type, e.g. a FTSE all share tracker.

Passive Investments

• The return on an investment which is down to the overall return on the market is known as Beta. For example, the overall return on the FTSE all shares index in a given year. Anyone can get Beta because all you have to do is invest in the whole market which is easily achieved via index tracking investments. Investment return which is not down to the overall market behaviour is called Alpha (and can be negative or positive). Alpha arises largely as a result of two things –market timing and stock selection. For example a clever fund manager may achieve returns above the market as a whole by making good decisions about what shares to buy and or using his skill to judge when the market has peaked or reached the bottom. There is no evidence to show that anyone has ever consistently added positive Alpha by stock selection and market timing. Certainly it does happen sometimes (though it’s impossible to know whether this was though skill or luck), but history shows that 75% of active fund managers fail to beat the overall market return of the area in which they are investing. Active fund managers charge significant fees for their services, but most of the time they do not add any value above a passive investment portfolio which is not subject to being sold and reinvested based on an individual’s perception of the state of the market. Fund manager's charges therefore further reduce portfolio performance in most cases achieving negative Alpha and hence reducing returns. This has the effect of giving a level of return generally achieved from cash –but with all the risk of being in the stock market –generally defeating the objective of long term investment.
   
• Grierson Dickens investment philosophy therefore involves investing via low cost index tracking investments, where possible via institutional class holdings not available to the retail investor but at a much reduced cost. We will not try and second guess the market by trying to buy or sell at ‘the right moment’ but we will rebalance your portfolio each year (where it makes economical sense to do so) to maintain the agreed risk and volatility and to enhance long term returns.

In Summary

• Scientific research shows that asset allocation is more important than stock selection or market timing. Active management is shown to add little consistent value but its costs reduce long term returns. Therefore at Grierson Dickens Limited we adopt appropriate asset allocations via low cost passive funds without the cost or influence of active fund managers.

Further Reading

• John C Bogle Sensible Little Book of Investing (ask us for a copy)
• The Intelligent Asset Allocator.
• William Bernstein. McGraw Hill
• Black Swans and Market Timing (how not to generate Alpha). Javier Estrada, IESE Business School, November, 2007
• Determinants of Portfolio Performance," Gary P. Brinson, L. Randolph Hood and Gilbert P. Beebower, Financial Analysts Journal, July/August 1986