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How advisers invest: ‘The safest bet is to hold the whole market’

Paradigm Norton financial planner Clémence Chatelin explains why her firm is wary of investing in concentrated portfolios that are favoured by active fund managers

Could you explain whether you approach investment management in-house, outsource it or combine both?
We have built a team of investment professionals with a wide range of skills to provide guidance and oversight of our investment approach for clients, and to ensure this remains fully fit for purpose.

The investment committee’s function is to routinely complete a rigorous and detailed review of our strategy, to provide ongoing due diligence and terms of reference to ensure continued suitability.

The internal expertise of the investment committee is augmented by the use of an external consultant, Albion Strategic Consulting.

It provides an external and challenging perspective, and makes sure we remain true to our values and objectives.

This combined approach ensures our investment methodology is both comprehensive and regularly reviewed. The committee helps us to remain current, and ensures that our approach to portfolio management, asset allocation and risk is being applied fairly and consistently.

What investment options do clients have?
Clients can invest along the whole spectrum of capital, from maximising risk-adjusted returns to maximising impact. We have model strategies but also tailor portfolios to our more complex clients.

These may include private equity investments in the form of venture capital trusts, enterprise investment schemes for tax planning purposes and sophisticated investors, and social investment tax relief investments for clients who would like to support social enterprises.

We also have ethical investment options and, after a great deal of research, will soon be launching our impact investing portfolios.

We believe that these portfolios will continue to develop, both through the volume of available funds and the impact they have. The growing trend of investing in impact funds is an area we intend to remain close to and, where possible, stay at the forefront of, by offering a range of portfolios that meet our clients’ requests.

How do you select discretionary fund managers, platform partners and underlying funds?
Our current investment strategy does not involve working with DFMs.

We select our investment partners through a combination of in-house research and external research provided by Albion. Reviews of academic research, analysis and fund screens ensure that we consider all available options available to us which may be suitable to our clients. We have a formal vote on adding or removing funds or partnerships.

How do you build model and bespoke portfolios?
We rely heavily on academic research to construct our model portfolios. We have a systematic approach to investing and a top-down approach to building our portfolios. We use investment funds and do not select individual companies.

Our geographic allocation is global, because research shows that in the short term, market panic and global contagion tend to result in markets falling together, but in the medium to long term (which should concern investors more), the underlying basket of economic growth provides protection from one economy performing poorly. 

Company factfile

Date company established: 2001

Assets under management: Around £1bn

No. of staff: 66

No. of clients: 1,120

Platforms used: 7IM, Transact, Standard Life

DFMs used: N/A

What are your views on using active and /or passive funds in building your portfolios?
In general, we do not choose actively managed funds because of their costs, the lack of evidence that over the long run they hold their promises of outperforming a benchmark on a risk-adjusted basis, and due to their concentrated strategies of 50 to 80 stocks. 

It is important to us to hold the whole market, as evidence shows concentrated strategies are much riskier because there is a significant skew to a small number of highly successful firms.

That is conflated by the impact of compounding their returns across multiple time periods. However, there is little evidence that these stocks can be picked in advance consistently through skill, so the safest bet is to hold the market.

When it comes to impact investing, the focus of maximising risk-adjusted returns shifts to striking a balance between costs, returns and, most importantly, maximising the impact with money.

In this case, active funds offer targeted exposure to companies that provide solutions – the 17 Sustainable Development Goals set by the United Nations. 

There is little other evidence that would give us reason to use actively managed funds, unless there was a specific aspect that we could not capture through systematic, evidence-based investing, such as impact investing.

What are the benefits to clients and to the business of your investment management approach?
There are many benefits to our strategy. It’s low-cost, evidence-based and, therefore, less susceptible to behavioural pitfalls. 

One of the key benefits is that we have an investment strategy that our clients understand, which can be tailored to their needs.

By focusing on long-term results and shutting out the noise of the markets – which could lead to regrettable short-term decisions – our clients can focus on what really matters: a life well lived.

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  1. One wonders why they need an investment committee and external oversight when their portfolios appear to be global passives.

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