Baxter Fensham Limited Financial Planners - Financial Planners, Wealth Managers, Tax Planners

As all our investors are aware our investment philosophy is based around four key principals:-

• Risk and return are related.
• To capture the long term returns available from the stock market (the capital markets) you must remain invested through good times and bad.
• After charges have been deducted it is not possible to consistently outperform the average market return by stock picking and market timing and as such a portfolio should be built of pure asset class funds and not “trendy” fund managers offerings.
• It is imperative that fund management costs are kept as low as possible as these simply eat in to growth or compound losses.
• Academic studies by Nobel winning laureates in economics have shown that a small tilt in your investment portfolio towards smaller company and value stocks gives you the opportunity on a long term basis to outperform the market average.

 So how has this philosophy worked over the last 12 months which has seen the world economy go through the biggest financial crisis since the great depression.

To answer this let us begin by looking at the FTSE all share index and how it has moved during this period of extreme volatility that many media pundits were forecasting was the end of capitalism as we know it.

On the 18^th of September 2008 (the week after the credit crisis was officially agreed to have commenced following the collapse of Lehman Brothers) the FTSE all share index (representing 98% of all UK stock market capitalisation) stood at 2,496 points. It then fell to a low of 1,755 points at the beginning of March 2009 representing a fall of some 741 points or 30%. It was during this period that many fund managers, stock brokers, investment advisers and IFA’s were advising clients to tactically move out of equities and to sit in cash as the outlook was bleak and the markets could continue to slide inexorably downwards.

Once again the entirely false premise that we were somehow entering a new investment paradigm was a belief widely held by investment professionals who wished to base their thinking on “noise” and media speculation rather than historical evidence. The result of this was that for the last 6 months many of these private investors who have been sat in cash have missed out on the subsequent rise in the equity markets.

On the 18^th of September 2009 exactly 12 months later the FTSE all share stood at 2,658 points some 6.5% higher than it did 12 months previously and rise of 51.4% since March 2009. To those advisers who find this a great shock and somehow unprecedented should look no further than our own economic history of the 1970’s. For during 1973 to 1974 the FTSE all share fell by 51.6% and once again the doom mongers were predicting an end to capitalism as we know it. However the following year the market rose by 151.4% eradicating all the previous losses and in fact providing those who had the courage to remain invested with a healthy profit.

However the sad truth of the market rally in the 1970’s and the one we have just experienced is that hardly any investors benefited from the full upturn because they were disinvested either as a result of their own trading or because of the active management strategies employed by their fund managers.

Our investment philosophy does not pretend in any way to be able to identify when market falls or rises will occur but merely to ensure that on average and over time, if you remain invested you will receive the benefits of the returns available from the capital markets. This has been our philosophy all along and as such any accusation that this article is written with the benefit of 20:20 hindsight is simply wrong.

Sadly however, this is not the experience of many private investors over the last 6 months as many of them traded out at low points in the market thus crystallising their losses and remained out until now thus missing the significant gains. These are profits that they will never be able to recover over their investment horizon and as such a now consigned to a long term underperformance of the market average in their portfolios. This may well have the ultimate impact of reducing their retirement incomes if it were pension funds that were disinvested, or providing funding problems for their children’s education costs if it were ISA funds.

If we therefore examine the performance of our portfolios we should find that they reflect these market movements fairly closely depending on the risk profile adopted by the investor at the outset. Using our balanced portfolio (60% equities 40% fixed interest) over the same date range we find that net of all charges and fees the portfolio has returned a 5% growth rate. Thus only 12 months after the most catastrophic period in global financial history after the great depression, we are very pleased to tell our clients that their investment portfolios are showing a profit.

It is just a shame that so many other investors are cradling painful losses through the smoke and mirrors that is active management.

If you would like to know more about our investment strategy or any other financial or tax planning opportunities please just contact Baxter Fensham ltd.

Nick Crabbe CFP

Baxter Fensham Limited is authorised and regulated by the Financial Services Authority

The guidance and/or advice contained in this website is subject to UK regulatory regime and is therefore restricted to consumers based in the UK.

 All data on the FTSE all share index is sourced from http://uk.finance.yahoo.com/q?s=%5EFTAS or Dimensional Fund Advisers matrix Book.

All data on the performance of the Baxter Fensham balanced portfolio is sourced from Transact and is available on request.

Tags: asset class investing, investing, investment, investment charges, passive fund management, performance