This week’s blog is a bit different (i.e. it’s quite interesting).

George (Mildred to the office) has spent the last few weeks delving deeply into the portfolios and their construction to rework and improve the monitoring and evaluation of their performance.

Two areas he has identified as vital to this are:

  1. Accurate benchmarking – making sure the portfolio performance is measured against the correct market average benchmarks to give a true reading of whether value is being added above just tracking
  2. Volatility control – making sure that performance is obtained by taking appropriate levels of volatility / risk, the aim is to lower risk and raise performance, the concern is to avoid raising risk to try to raise performance (which is generally when things go wrong with investing).

The outcomes of George’s forensic analysis are the following conclusions.

Past Performance of Portfolios

The table below is based on performance from 1 January 2009 up to the end of August 2012.

Cautious Income Cautious Growth Balanced Growth
Performance 61.25% 61.52% 59.61%
Benchmark 29.55% 32.11% 31.90%
Outperformance 107.28% 91.59% 86.87%
Moderately Adventurous Growth Adventurous Growth
Performance 56.36% 54.16%
Benchmark 32.10% 28.90%
Outperformance 75.58% 87.40%

You should note that past performance is not a reliable indicator of future returns and the value of your investments can fall as well as rise. The total return reflects performance without sales charges or the effects of taxation, but is adjusted to reflect all on-going fund expenses and assumes reinvestment of dividends and capital gains. If adjusted for sales charges and the effects of taxation, the performance quoted would be reduced.

We are pleased and proud of these performances as we have created value but this has not been at a consistent level, 2011 was relatively much less rewarding.

There is little about the future that we are confident to predict but here is something we know will be true.

“The portfolios will have periods of underperformance”.

In 2011 the extreme volatility and tensions in Europe caused huge levels of funds to flee to safe havens such as sovereign debt, this investment class was poor value going into 2011, by the end of 2011 with German Bunds being issued at 0% interest they were into bubble territory.

As we did not hold these investments we did not perform well in fixed interest but to do so was to invest in a highly overvalued asset class which will suffer a significant loss of value at some point, this is therefore a greater fool and market timing type of investment which we do not want to be part of.

The same reasons contributed to some equity fund underperformance with high dividend national and international stocks doing well although their valuations (such as utilities) are historically high.

The performance in 2012 has however been strong with valuations starting to more accurately reflect value in some of 2011’s unloved sectors and markets.

Volatility / risk

(Mildred aka George will explain)

To achieve this outperformance the question has to be asked whether we have taken extra risk and therefore created additional volatility to your portfolios. Below are two charts. The first looks at the Cautious Growth Portfolio and the second the Adventurous Portfolio.

What these charts show are the number of months since the 1 January 2008 where the fund has returned between two figures, so for example 3 – 4% etc. What we would expect to see is that the returns for the more cautious funds are closely bunched together (there will be outlier months) and for the adventurous portfolios a much wider spread (I.e. greater volatility). As you can see from the charts this is what is happening:

Cautious Growth Portfolio

Adventurous Growth Portfolio

Looking at the Cautious Portfolio over three years the volatility of the portfolio is 8.80% so this is the swing between plus and minus. Looking at the chart it shows 14 months over the whole period (44 months) where the returns plus or minus bunch around zero to 1. This is important because it demonstrates that we are keeping the volatility low but still able to achieve the returns.

As a contrast the Adventurous Portfolio has a volatility of around 12.58% and hence the much wider swing in performance each month. The data is harder to analysis but the falls between zero and 2 are almost equally weighted at 5 and 6 months and the gains swing between zero to 1 and 3 to 4 as the high points are equal at 5. So this reflects the more volatile nature of the portfolio but even this is seen as low for this type of fund.

Although the Adventurous Portfolio has significantly outperformed the benchmark as our recent briefing paper highlighted the equity kicker has not fully benefited the portfolio but we expect that to change over the long term.


We constantly review how the portfolios perform to ensure that we are delivering long term outperformance. Since launch we have been able to do this during significantly volatile periods. In addition to the outperformance we have not undertaken any additional risk and in fact kept this to a minimum. This doesn’t mean your capital is not at risk but we are mindful of this and therefore we are looking to provide downside protection as well as providing upside benefits.

Over the coming months I will pull out additional information and data which we think will be of interest to you.

NOTE: This is written in a personal capacity and reflects the view of the author. It does not necessarily reflect the view of LWM Consultants. The post has been checked and approved to ensure that it is both accurate and not misleading. However, this is a blog and the reader should accept that by its very nature many of the points are subjective and opinions of the author. This is not a recommendation to buy any product or service including any share or fund mentioned. Individuals wishing to buy any product or service as a result of this blog must seek advice or carry out their own research before making any decision, the author will not be held liable for decisions made as a result of this blog (particularly where no advice has been sought). Investors should also note that past performance is not a guide to future performance and investments can fall as well as rise.