2010 01 28 concept-investment-philosophy V1

If you are serious about your financial future,we would welcome the opportunity to meet you for an exploratory meeting.Call 01737 225 665 email [email protected] or visit www.conceptfp.com

Bank Chambers, 2 Church Street, Reigate, Surrey, RH2 0ANConcept Financial Planning Ltd. is authorised and regulated by the Financial Services Authority

When it comes to obtaining investment management advice, investors have an array of options:

• Stockbrokers

• Discretionary Investment Managers

• Investment Banks

• Independent Financial Advisers

• High Street Banks

All purport to offer an “Investment Management” service, all purport to be experts and yet very few can demonstrate any real added value.

Various studies have shown that it is asset allocation which has by far the greatest bearing on investment performance but still investment houses commit huge marketing budgets to advertising their stock selection skills. Despite these claimed skills there are only a handful of managers who consistently outperform the market and those that do are often adopting a very contrarian approach which inevitably results in periods of significant short term underperformance.

That most managers underperform is not surprising. Asset markets have become more efficient making it harder to uncover hidden value and, with total fund charges of between 2% and 9% per annum*, uncovering value that outweighs cost is harder still.

This document sets out our investment management philosophy and gives an overview of the process we adopt. A full explanation of practices and procedures is available on request. Our investment management service is available to individuals, corporate entities and trustees.

*Source: Bernstein 2001

Investment Management Philosophy and Process



In the last few years investors with “cautious” portfolios have seen the value of their portfolios drop significantly. Although market conditions have been among the worst on record, one suspects that there may also have been some misunderstanding as to what a cautious portfolio ought to look and feel like.

At Concept we take the time to properly explore client risk tolerances. We use psychometric testing which provides a robust and proven method to assess and test individual attitudes. What constitutes risk and how risk manifests itself differs between individuals. Exploring a range of different factors gives a rounded view of an investors overall attitude to risk.

Having established risk tolerance we then discuss whether this is consistent with investor’s goals. The investment Holy Grail is a portfolio that delivers consistently high returns with minimal volatility but in reality investors face a trade off between risk and return. Where return expectations are incompatible with risk tolerances we highlight this and consider where compromise might be found.

Consider the TimescaleAn individual’s attitude to risk rarely changes but what constitutes risk is very much dependent on the likely investment timescale. If an individual has a 10 year investment time horizon their investment strategy will differ from that which would have been adopted if they were investing over a 20 year timeframe. Their risk tolerance has not altered but the degree of risk associated with any single investment decision reduces the longer the time frame.

Understand Risk Tolerances



Once risk tolerance and time frame have been ascertained we set the appropriate asset mix. In other words, how much money should be allocated to a particular asset class.

Modern Portfolio theory introduced the idea of the efficient frontier. Essentially this shows that blending asset classes whose returns are not strongly correlated can improve overall returns but more importantly, reduces volatility.

The landmark study “Determinants of Portfolio Performance” published in the Financial Analysts Journal in 1986 suggested that well over 90% of investment performance is derived from asset allocation decisions, not market timing or stock selection. These findings were confirmed in the follow up study by Brinson, Beebower and Singer in 1991, and numerous subsequent academic studies have reached similar conclusions.

We use external research which blends stochastic modelling (the process of producing multiple simulations of the performance of the portfolio based on the probability distributions of the individual stock returns) with subjective views of the future based on likely prevailing economic conditions. To ensure acceptable liquidity and diversification, additional constraints are imposed.

From the above research we produce 50 risk graded portfolios. Clients are allocated a portfolio based on their natural risk tolerance and the potential investment timescale.

Set the Asset Allocation

The Determinants of Investment Performance



Having decided on a suitable asset allocation model, only then do we move to selecting the appropriate investments to derive the required asset exposure. To aid diversification we tend to use collectives rather than direct stocks since collectives offer exposure to a much greater number of stocks at a lower investment level. Where it is deemed appropriate to use direct equity we will outsource this function to a carefully selected discretionary manager.

Past performance tends to be a pretty unreliable guide to future performance so although we utilise the services and data of three investment research

companies to assist us in fund selection, we also place a lot of emphasis on charges. Future returns cannot be accurately predicted but we can be certain that the cumulative effect of a high annual charge will act as a significant drag on performance. In gaining exposure to mainstream markets we often advocate a passive investment strategy which simply aims to capture the market return rather than seeking to outperform.

Where we are looking at more specialist markets the arguments for using a skilled active manager are more powerful but again, rather than looking purely at past performance we use in depth qualitative research which draws upon the findings of our external research partners.

Tax PlanningJust as charges act as a drag on performance so too does tax. We therefore consider investors current and likely future tax position and, where appropriate, that of their spouse. We also look at whether the bulk of returns are likely to come from income or from capital since this will have a bearing on how the asset should be held.

Investment Selection



Because we are blending assets which do not have closely correlated returns, asset weightings will change as time goes on with the better performing assets accounting for a larger portion of the portfolio and the worst performing assets accounting for a smaller portion.To address this we rebalance portfolios annually. This ensures that we are taking profits following periods of strong growth and buying assets when prices have fallen. The suggested asset allocations may themselves change over time to reflect changes in the economic outlook and when this happens portfolios are rebalanced in line with the new model.

The constituent parts of our portfolios are kept under constant review. If there are any significant changes e.g. a fund manager leaving, then an immediate review of that fund is conducted and a decision is made to either hold, put on

review or sell the fund. We would then make this recommendation to you as part of the service and take your instructions. We do not just move funds without your consent as we operate on an advisory not discretionary basis. Otherwise, the fund is monitored under our traffic light system when the Concept Investment Committee holds their regular monthly fund review meetings.

Review process

SummaryWe believe we have a very compelling investment proposition. We have invested heavily in independent risk profile tools, asset allocation modelling and fund analysis research. We place far greater emphasis on setting asset allocation in line with risk tolerance and investment timescale than on chasing the

latest hot fund. We also place an emphasis on looking at the factors that we know will affect performance i.e. charges and tax. Finally we ensure that our process is continually applied so that portfolios are not allowed to drift and continue to match investors objectives and risk tolerances.

2010 01 28 concept-investment-philosophy V1

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