Discretionary Portfolio Management
Goal-based, outcomes-driven investing
Our investment service is designed to deliver the explicit target outcomes of goal-specific plans. We refer to this general approach as ‘outcomes-driven investing’. Its equivalent in institutional investment is Liability-Driven Investing. We call our fully-customised portfolio solution a ‘Defined Outcome Portfolio’.
Examples of goal-based portfolios:
Funding educational costs
Funding retirement spending
Living off a settlement (eg a clean-break divorce settlement)
Hedging a medium-term liability to invest in property (eg for your children)
Investing for the benefit of future generations (whether in or out of trusts)
Delivering regular draw from an endowment or trust without eroding real capital
Outcomes are defined by a number of attributes:
Real (after inflation) or nominal (fixed in monetary terms)
Stream of cash flows (eg spending) with multiple time horizons or a sum of capital with a single horizon
Tolerances and constraints: for instance, minimum spending of £x pa; not running out before year y; at least a 90% chance of achieving a capital sum of £z in 15 years
Assigning capital to goals
Portfolios are managed at a goal level which can encompass assets held in multiple locations and even by multiple people. This approach gives us more flexibility with regards to tax optimisation and allows us to focus on delivering the desired outcome from your capital.
In the ‘real world’ money is of course held by different legal owners in different accounts. It is a goal-planning structure that assigns wealth to a notional portfolio for each different goal, each with its own time horizons and outcome tolerances.
More than one individual may contribute resources to each goal.
The goals, rather than total wealth, shape the controls over the way the money is managed to achieve those outcomes.
The goal progress and performance reports, including an appropriate performance benchmark, are specific to the goal-based portfolio rather than to the total assets under our management.
Though planning will identify all different goals, the best solution may be to combine them if, for example, the secondary goal can be allowed to modify the way the primary goal is managed. For instance, in the examples above, a retirement goal could be managed with a different risk approach to that required by the primary owners because the next generation will benefit from the payoffs of their risk taking.
We adopt cutting edge techniques, now commonly employed by large institutions to deliver returns seeking to match/hedge individual goals using systematic computer modelled approach.
There have been for some time technical solutions that make the challenge of delivering specific, quantified outcomes at defined times, subject to individual constraints, relatively simple for genuine experts. These solutions have already made dramatic inroads in institutional investment, because clients such as pension funds and college endowments realised they had unique goals but saw their portfolios were standardised and knew that could not be right.
Standardised portfolios, whether for individuals or institutions, have no choice but to rely on diversification across a number of different asset classes or strategies to manage risk. Because they are standardised, they focus on single, short-period volatility (how bumpy the ride) rather than the more important uncertainty about real outcomes (what will my money buy when I need it), which is the risk that outcomes-driven investing focuses on.
This risk can be managed without relying on diversification alone, by combining risky ‘real’ assets like equities with risk-free ‘hedges’ that provide certain (or near-certain) outcomes when you need the money. Where money is needed at different times, such as to fund retirement spending, the assets are matched to all these different time horizons. This way, a portfolio can be dynamically managed to remain consistent with an agreed range of tolerable outcomes for each horizon, even as market conditions change and the horizon gets nearer.
By specifying (and continuously reprojecting) the range of probable outcomes, clients can make risk choices that flow naturally from thinking about the consequences of different outcomes. This makes any conversation about risk tolerance highly specific and relevant instead of abstract.
Active versus Passive
A wealth of academic research has shown the cost of investing to be a significant drag on returns. We seek to minimise this and thus improve returns by opting for lower cost and less research intensive investments.
Much of the cost of investing arises from managers’ activity around researching and choosing between either individual securities or different fund managers. These are activities associated with ‘active’ selection.
The alternative to active selection is to implement the chosen market exposure through a fund that tracks or replicates the performance of a representative index for that market. This is known as ‘passive’ investing. It is much cheaper and removes any uncertainty about the actual manager return relative to the benchmark index. Though active management appeals to the optimist, there is an increasing move in both institutional and private-client investing towards a passive preference. It reflects a realistic assessment of the poor chance of exceeding the high cost hurdle in active management and the small scale of the best likely benefit.
Our approach is active at the level of asset allocation but passive at the level of implementation, an approach often referred to as Active/Passive.
A systematic approach
In these sophisticated solutions the underlying data and techniques are highly complex and it is usually only by adopting systematic or computer-based processes that firms are able to manage fully-customised (or even unique) outcomes-driven portfolios so cost-effectively. This is the highly-specialised industry context from which Fowler Drew came.
Discretion rather than advice
Dynamic portfolios driven by systematic rules require the flexibility to trade at the point required by the modelling.
Delays to the decision making progress could reduce the efficacy of the model so Fowler Drew provides discretionary portfolio management rather than advisory. In an advisory relationship, the adviser needs the approval of the client before instigating portfolio changes.
Custody of your assets
We do not hold or control client money. The custodian of the money is a specialist ‘platform’ provider and investments will be registered in its nominee name to your order. The platform provides custody, dealing services, financial reporting and applies these to a range of different accounts or ‘tax wrappers’ including General Investment Accounts (taxable), ISAs and SIPPs.
Customising the service elements
Not all wealth, or all goals, require the same level of service or complexity in scope and structure. Later-stage goals, such as managing the process of living off capital in retirement subject to a set of constraints, is a much more demanding objective than, say, building up the capital in the first place, where the greatest decision, deciding on the risk approach, need not be altered frequently. Multiple goals are more complex to manage than single goals and a goal may have money contributed by only one rather than two individuals. These all make a difference to the service.