When it comes to sport, I have very little interest due to a low attention span! However, I am fascinated when the underdogs win, or when great teams emerge. There are many books on what makes a great team and what creates success but often I think the ingredients are simple.

For a great team to work, everyone plays together and not as individuals. I have seen teams where the “star player” has had a bad day, and yet others in the team step up when it is needed. That is really the secret to a great team.

In terms of financial planning the secret to success is not dissimilar; every element interlinks. We have in previous blogs talked about the importance of planning and goals. This is where everything starts from. Once we have a plan, we use the appropriate product (for example ISA, Pension etc) and then the investment strategy which help to deliver on the plan. One element cannot work without the other.

For example, if we just focus on the funds, then we are likely to be at some point disappointed because we don’t know why we are investing or what the money is for.

In previous blogs I have talked about the different aspects of the package but in this one I want to focus on the funds element.

Investing money

There will always be suggestions that investing money is easy, or that investing is nothing more than gambling.

The process we have adopted has been developed over several years, and we are constantly challenging ourselves on the metrics that we use in monitoring funds. One of the overarching messages we use is that we are looking to grow money slowly; we are not gambling, we are following a process with a defined outcome.

To further expand on this, we recently met a fund manager who explained that with his fund he was looking to deliver a positive return for investors with no alignment to a benchmark. Effectively, investors were being asked to trust him on what that return would be with no guide to whether that was good or bad. To be fair it seemed a good fund, but it left me puzzled.

The reason why was because I had nothing to test whether the manager was achieving the best outcome. To expand, our portfolios have returned strongly since launch but what does this mean going forward? We believe that average returns of between 4% and 6% after charges are realistic; we can’t guarantee this, but it seems a fair target range based on past and expected future returns.

There are two things with this, firstly all returns should be considered over a 5 to 10-year time-frame, and secondly there will be years when the returns are positive, and also when they are negative. The ride is never going to be smooth. (I wish!)

So, clients have an idea of the outcomes we are looking to achieve but the second aspect is how to compare whether this is good. This is difficult without knowing where to set your comparison. If we compare to the Global Index then we would need to have significant amounts of US exposure to compete with this index, and it doesn’t reflect any diversifying strategies like bonds. Therefore, the only way we think we can do this fairly is to build a similar portfolio of assets using funds which track the index.

What about the index?

As investors we are not looking to second guess the market. This means that if we compare the portfolio performance to the FTSE 100, S&P 500 or a global index there will be times when the portfolio is performing as well or better, but sometimes it is not. But this is comparing apples with pears. We are not trying to outperform these indices although the underlying holdings might be.

The only true way to compare is by having a similar basket of assets which track the different indices. Our aim is to outperform these. If we can outperform by 2 to 3% p.a. this over time makes a significant difference and this is where we believe we can add value.

Over the short-term there will be periods where we underperform the index, but our focus is on the long-term.

Is it not easier to invest in the index?

Investment managers expect to get around 60 to 65% of their investments right. If they do, then they should outperform the index. In markets like the US however it is much harder to beat the index; not impossible, but it is harder.

Over three years, 75% of the funds we use have outperformed their underlying index.

This is high but we would like to improve on this. We will cover some of the reasons for underperformance but the other aspect of this is volatility, which is the movement in the price of the fund over periods of time. When markets fall then the index tends to fall less than the portfolio. The usual argument is that to get outperformance you need to take on more volatility. Some clients do not want to take on this extra volatility and therefore a fund that tracks the index might be the best option.

Our research looks at the underlying funds to see what levels of risk/volatility are involved. The findings might surprise some. As it stands, 80% of the funds we select from, take on less volatility than the index they are linked to. This is important because it shows that if we do our research well, we don’t have to layer up volatility to get better returns.

In summary, the argument that it is easier to invest in the index is compelling, it can be cheaper and less volatile. But if we do the research then we can identify those managers who can add value over the long term without adding volatility. The charges may be higher but the trade-off in terms of outperformance could make this a price worth paying. It just takes time and research.

What about the 25%

We have indicated that 75% of the funds we use outperform the index, this means 25% haven’t. This can change month by month.

When a fund starts to show signs of underperformance, we do a lot of work trying to understand why this is. For example, we might have invested in a fund when it had £100 million of assets. A smaller fund can often do a lot better than a bigger fund because they can be more flexible. If that fund grows to £2 or £3 billion, and performance starts to slow then this can be an indicator that perhaps size is hampering performance.

It is not necessarily the only reason, so we must dig beneath the surface, meet the managers and ask questions. We have previously selected funds where they have underperformed but we believe the fund is better positioned than others in the sector, and we have retained them for this reason.

In summary, it is easy to strip out the 25% but if we believe in the funds and the managers then we also believe that things will come good. If our research shows that this is unlikely to happen then we can make changes.

Looking at the returns, surely, we can do better

At the start of the blog we talked about teams and how the investments are part of the package. Our focus is on growing money slowly to achieve the end goal.

We are not going to make big bets because research shows very few people (if any) get it right. I could perhaps guess that the best places to invest in 2019 are the UK, Vietnam and Brazil. At the end of the year I might be right, or I might be wrong. If I invest all the portfolios in these regions, I am taking a risk, if I am right then the returns could be really good, if I am wrong then we can nurse negative returns. I then need to think about where I go next year and the year after. I would suggest that is gambling.

This is not what we are about; we diversify assets across regions and business sectors. Sometimes, we might focus on particular aspects of the global market. For example, in some of the higher risk portfolios we have more exposure to bio-technology, technology and emerging markets because we see these as long-term growth areas. But at the same time, we continue with exposure to other areas, so we are not reliant on just one or two themes.

Some clients feel strongly about certain sectors and regions, our view is this. If there is a proportion of their cash which they are happy to take high risk with then set it aside and use it for that. This will depend from client to client. A book I recently read started by asking the client how much of their wealth would they be prepared to lose. If it was 5% then that was the amount the client kept back to invest in wherever they wanted. No advice was given on this, and it had no impact on the overall plans. The client understood that sometimes they would get it wrong, and sometimes they would get it right.

In summary, if we had a different mandate and we were traders with no focus on planning and goals, perhaps we could do better. But this is not our job, we are not experts in this, and we just want to grow money carefully and slowly. If a client wants to take outside bets, then the question they must ask themselves is how much they can afford to lose on such a decision?


I am asked what my job is; it is a combination of things. I wear the compliance hat (making sure we do everything correctly), I work alongside the team on the operational side and as a team, I manage the portfolios. What I don’t do is provide financial planning advice.

But I know that everything comes from the financial planning that is done. Understanding what an individual wants to achieve is important to everything we do. Plans can be simple; providing an income when we stop working, providing for children etc. It can be more complicated around tax planning etc.

Once we know what the client wants to achieve then we can start to build solutions. The investments are part of that solution. We spend a lot of time meeting managers, working through the models but ultimately, we are focused on the top line of delivering on goals. We know that in periods when markets go down, the portfolios will potentially underperform. But we also know that we don’t have to take significant risk to get returns. We also know that in many cases (not all the time) that active fund management works but we have to do the research to prove that this adds value, if it doesn’t then we can opt to use trackers in some areas.

In summary, if you compare our portfolios to say the FTSE 100, then there will be periods when they underperform but that is not comparing like for like. We know that in theory we could try to anticipate where the market will rise and get better returns, but this is not what we do.

We want to help clients reach their goals – this makes them and us happy! We know we have done our job. The reality in almost all cases is that goals change, and when one is achieved another is created. This is why we aim to build long-term relationships where we are there at different stages of people’s lives.

Returning to the team analogy; try not to look at the portfolios at LWM as the ‘star performer’ because they will likely disappoint at some stage which is normal as we go through a cycle. Consider the whole package; the planning, the goals, the vehicles, the trust that is given to us and the service to you. In this way the performance becomes part of the overall team. We are not belittling it and a lot of work is done behind the scenes, but it is not the star performer!

We are obviously very proud of our performance over the last 10 years, but the ‘team’ in itself has risen to many challenges and it is only possible when all areas work together to create something special. We aim to continue this at LWM.

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. 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.