+ 1. Understanding investment risk

Investment risks come in many guises and a significant amount of our time is spent assessing those risks. Largely because of the possibility of not getting back some (or all) of the money you invest, share price and market risk is generally focussed on. This is especially the case with the industry regulator the Financial Conduct Authority (FCA). There is, however, also a risk in holding cash on deposit, as its real buying power is eroded over time by inflation. These risks and the potential rewards that go with them are core to our advice and we ask you to complete a risk questionnarie at the outset so that we may understand your personal attitude to risk.

As a general rule, investments that have the highest potential return also carry the greatest level of risk. Risk can be viewed as a pendulum, with risk on one side and reward on the other. The pendulum can swing high on the reward side, but equally high on the risk side. The degree of the swing is the ‘volatility’ or risk of the investment. The assessed time it takes for the pendulum to complete a cycle (this will always be a guess) is also important as this sets the investment time horizon – for how long the capital is invested. Your investment time horizon is driven by how long you wish to remain invested and is an important part of the assessment of risk.

+ 2. Investment screening

The number and coplexity of investment products can be bewildering. There are many thousands of funds in the universe for UK investors, a number that has been swelled by the advent of bespoke index tracker funds. Passive Fund Mangers can now provide any index that the market demands. In theory, the investment sectors identify funds with a common investment objective allowing for the comparison of funds against their sector peer group, however, the variation in performance between the best and worst funds within a specific investment sector can be staggering. It is key to select investment funds that are either consistently outperforming their sector peer group, within acceptable risk tolerances, or are consistently outperforming on a risk adjusted basis. In order to narrow down this universe we use screens to eliminate the serial underperformers and funds that have unattractive risk characteristics. We then apply another filter which narrows the universe still further. This allows us to focus our research on a smaller group of funds which we consider worthy of in depth analysis.

+ 3. Fund analysis

Once we have applied our screens, the next step is to evaluate the funds in greater detail. We use proprietary risk sheets to provide us with an overall risk rating for each fund. This research looks at both qualitative and quantitative factors. Quantitative analysis focusses mainly on downside risk and volatilty compared with other assets. Qualitiative analysis looks in depth at the holdings of the fund, the style of the Fund Manager, experience over a whole economic cycle and other factors such as the level of turnover or whether the Fund Manager has his own money invested in the fund. We combine this individual fund analysis with our assessment of the economic environment to provide a risk rating for each fund. Once a fund has been selected for the model portfolios we monitor performance weekly and review portfolios formally once a quarter to ensure that the funds that we have selected continue to perform in the way we expect them to.

+ 4. Sector risk assessment

To ensure that we remain on top of the changing economic and market conditions we review the risk rating of each sector of the market on a quarterly basis. The IMC manages this process by reviewing the global macro economic environment and allocating a risk rating to each sector, based on the outlook for the following year. The objective is a dynamic process which reflects changing economic conditions and the implications for risk to the different asset classes.

+ 5. Portfolio construction

The model portfolios are made up of blocks of risk rather than traditional asset allocation models. They key to our process is that we blend funds from across the risk spectrum. This varies according to the respective risk profile of the model portfolios. Based on a scale of 6 we classify funds from minimal risk to extreme risk. We operate 7 model portfolios based on active fund selection. These are designed to offer investors a steady increase in both underlying risk and growth potential. In addition, we offer a passive selection which mirrors the risk profiles of the active funds. We also offer ethical portfolio and portfolios specifically designed for charitable organisations.