The Last Crusade

– search for the investment strategy Holy Grail

I am one of those industry veterans who, whilst still having some way to go before retirement age, can boast 30+ years of experience in investment management.  The earliest of those years was spent managing discretionary portfolios totalling some £40m of private client moneys (I am talking the 1970/80s here!).  Although slightly more removed from the coal face these days my interest in the industry search for the Holy Grail of investment strategy remains just as strong as ever.

 The ideal combination of low costs, low charges, competitive performance and minimal drawdowns (reductions in value) has eluded academics and practitioners alike ever since stockmarkets evolved almost two centuries ago.  Index trackers and absolute/hedge funds have been the most recent attempts but both have failed miserably to deliver anything remotely resembling consistent upward-only performance.

After all this time it is pretty clear that the emotional drivers behind efficient stockmarkets, the urge to speculate in shares, means that there isn’t and never will be a formula for achieving consistent stockmarket returns.  However, my study of markets over the last 120 years and more does indicate that markets undoubtedly move in both short and long term trends, normally linked to economic and political factors at play in the global commercial world.  Trend following (and trading strategies through the use of moving averages) has also, therefore, been a feature of investment management for a long time.

It is therefore with great pleasure and amusement that I have discovered that a combination of trend-following and trading triggers, based on moving averages, has now been demonstrated to be the most reliable means of managing a portfolio over the medium to log term – BUT ONLY if all subjective and emotional human input is removed from the management equation!  Extensive research from professors at the City-based Cass Business School has indicated that investment performance is enhanced and volatility reduced by adopting a purely mechanical but entirely logical process to manage investment portfolios.

I am also delighted to add that the practical application of this research has been brought to WAY Fund Managers courtesy of Hasley Investment Managers (and their captive professors from the business school) and is now available to investors via the WAY Hasley Global Momentum Fund.  This fund invests in 24 mature stockmarkets via 14 low-cost ETFs, with each ETF being invested, or not, each month depending on a moving average trigger.  The process means that the fund can be up to a month or more late in joining any particular trend, depending on precisely when it started, but that it tends to fully participate in all long term up-trends and totally avoid all long-term down-trends.  The (back-tested) result shows impressive performance and great risk-aversion.  I can commend it to you as a major core holding for virtually any long term portfolio.

Associated Links:

Website: WAY Hasley Global Momentum Fund
Website: Cass Business School (City University London)
Website: Hasley Investment Management LLP

Paul Wilcox
Chairman & Technical Director, WAY Group
11th May 2011
www.waygroup.co.uk

Posted on 11th May, 2011 | Tags: Cass Business School, ETFs, Exchange Traded Funds, WAY Hasley Global Momentum Fund |
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New fund launch: the WAY Hasley Global Momentum Fund

Today we launched the WAY Hasley Global Momentum Fund, ushering in a new era in fund management dynamics. The WAY Hasley Global Momentum Fund is a global momentum fund investing in developed markets primarily through the medium of Exchange Traded Funds (ETFs). A proprietary trading system based on specific moving averages is employed and the process is mechanical with no judgemental overlay…

1. New fund based on a trend-following momentum process
2. Low management fees through use of Exchange Traded Funds (“ETFs”) and cash
3. Investment decisions driven by academically researched rules
4. Impressive back-tested results

WAY Group and Hasley Investment Management have joined forces with leading academics from London’s prestigious Cass Business School to design and launch the new trend-following Global Momentum Fund on 28th February 2011.

The Fund – which is likely to pave the way for a new type of investment methodology in the UK retail market – is designed to offer exposure to 24 developed equity markets via low-cost Exchange Traded Funds (ETFs).

The Momentum Fund will compare indices with their moving averages on a monthly basis to determine whether investors should stay in a rising market – or move into cash to avoid market falls.

The Fund will invest in equally weighted baskets of developed world equities, but will move into cash if sell signals flash red.

“When an index goes through the moving average at the bottom, it comes out of equities, and when it’s above, it stays in,” said Professor Andrew Clare of Cass, originator of the ‘rules-based approach’, along with colleague Professor Steve Thomas.

Back-testing for the Fund has determined that it should be able to match or beat a long-term buy-and-hold strategy, yet with two-thirds of the volatility.

“In a test from 2001 to 2010, the strategy achieved a compound annual return of 6.6 per cent with 9.6 per cent annualised volatility, compared with a 1.9 per cent compound annual return with 16.6 per cent volatility from the MSCI World index,” added Professor Clare.

Investors have long struggled to find funds which consistently beat the index and this has led many toward buy-and hold (or passive) funds which can be bought at a more modest price. The difficulty here is that such funds will follow markets down as well as up and this fund will look to perceptively reduce this negative trait.

Eddie O’ Gorman, of The WAY Group, said that the Fund is the first step in a series of launches likely to alter the UK investment landscape.

“There are some outstanding creative investment opportunities out there, and with this powerhouse of academic research as a dynamic driving force behind WAY/Hasley investment protocols, we believe investors will genuinely be provided with something fresh and beneficial to begin 2011.”

References:
Data & Statistics: WAY Group Limited, Hasley Investment Management LLP

Footnote:

1. Professor Steve Thomas is a graduate of LSE and Southampton Universities in Economics and Econometrics and has published extensively in international research journals for over 25 years. He was recently ranked 11th in Europe for finance research since 1990. He has been a finance professor at the University of Wales and Southampton University prior to joining Cass, and a Visiting Professor at Queens University, Canada, and the ICMA Centre, Reading University, UK. In 1990 he was the Houblon-Norman Fellow at the Bank of England. For over 20 years he has been editor of Interactive Data’s (formerly FT) credit rating publications; he has extensive experience in professional education and training in all areas of economics and finance for banks and related institutions and is an examiner for the Investment Management Certificate of UK SIP.
2. Professor Andrew Clare is the Professor of Asset Management at Cass Business School and the Associate Dean responsible for Cass’s MSc programme, which is the largest in Europe. He is also the co-founder and chairman of Fathom Consulting, a leading London-based economic and financial market consultancy. He was a Senior Research Manager in the Monetary Analysis wing of the Bank of England which supported the work of the Monetary Policy Committee. While at the Bank Andrew was responsible for equity market and derivatives research. Andrew also spent three years working as the Financial Economist for Legal and General Investment Management (LGIM), where he was responsible for the group’s investment process and where he developed LGIM’s initial Liability Driven Investment offering. He has published extensively in both academic and practitioner journals on a wide range of economic and financial market issues. In a recent survey Andrew was ranked as the world’s ninth most prolific finance author of the past fifty years. Andrew has also recently been appointed to the investment committee of the GEC Marconi pension plan; this committee oversees the investments and investment strategy of this £3.2bn scheme.
3. Located in the heart of London’s financial district, Cass Business School is a leading provider of business and management education. Its MBA is recognised globally as a market leader, and Cass has the widest portfolio of Specialist Masters programmes (MSc) in Europe; its Undergraduate School is one of the best in the UK. It is ranked in the UK’s top 10 business and management research schools.

Associated Links:

Website: WAY Hasley Global Momentum Fund

Website: Cass Business School (City University London)

Website: Hasley Investment Management LLP

Paul Wilcox,
Chairman & Technical Director, WAY Group
28th February 2011
www.waygroup.co.uk

Posted on 28th February, 2011 | Tags: ETFs, Exchange Traded Funds, WAY Hasley Global Momentum Fund |
Comments: 4 Comments

When is a fund a portfolio?

Advisers’ own label funds are highly tax efficient
Clients who invest into IFA firms’ own-label portfolio-style collective funds can gain freedom from capital gains tax on their returns as well as keener pricing and the ability to mix and match funds.

When is a fund a portfolio?
Peter and Mary Singer are recently retired and have been taking advice on how to invest their surplus savings which, of course, includes tax-free lump sums from both Peter’s and Mary’s pensions.

Their adviser works within a major IFA firm which has its own fund management company offering discretionary investment management to clients such as the Singers. They have been advised to place a large part of their available funds within the firm’s own portfolio style collective funds with a smaller proportion directly invested in specialist funds and shares. They are concerned as to whether they are being shepherded into a fund which is as much for the benefit of the adviser as it would be for them.

This is an interesting dilemma which in some ways is part of the focus for the FSA’s current work on the much heralded Retail Distribution Review (RDR) and their recent thoughts on the merits or otherwise of ‘Distributor Influenced Funds’ (DIFs).

The answer lies in provenance
Following the 1980s scandals surrounding broker bond funds it would be lazy to simply write off ‘own label funds’ as yet another self-interested money-making idea for adviser firms. In fact in almost all cases this would be an incorrect assumption. To put these portfolio-style funds into context we need to follow their provenance from the discretionary investment services which have existed for more than a century, to their current highly contemporary manifestation.

It was traditionally the stockbroker to whom investors turned and the stockbroking community has a long history of managing individual bespoke portfolios for wealthy investors. The benefit of bespoke services was that each investor’s own requirements could be satisfied, by an individually-tailored selection of investments making up a personal portfolio. Furthermore the client was in direct personal contact with their stockbroker and was able to derive confidence from the personal nature of the relationship. Going back one hundred years or more the whole industry worked in a more leisurely and controlled manner than hitherto, commensurate with the limited speed of communications and administration of the day. In spite of increasingly volatile markets throughout the 1920s and 1930s, the manner in which these services operated continued undisturbed.

Sea change in control
It was only in the 1980s that a major sea change occurred following Margaret Thatcher’s removal of exchange controls in 1979. Investment managers then had increasing access to the international markets in order to buy shares in successful companies from across the world at the forefront of the new age of globalisation. This coincided with the information age when computerisation and global media access changed the investment scene forever. From that point on it became extremely difficult to operate effectively as a private client stockbroker whilst holding oneself out as an investment manager. Each of those jobs became so specialised that it was impossible to do both well. Either you were a client-facing stockbroker or you were a specialist investment manager. This demarcation has fed through to the typical high net worth advisory firms of today, whether stockbrokers or financial advisers, and the person you see for advice is generally the GP who within the practice employs investment specialists to actually manage client portfolios.

Own-brand portfolio evolution
All very interesting, but the relevance of ‘own brand’ portfolio-style funds is a direct consequence of this evolution and the various factors behind it. I remember managing over 700 individual discretionary portfolios back in the 1980s in the build-up to the market crash of 1987. When a change of direction was called for, my colleagues and I trawled through every single portfolio marking out the necessary re-balancing prompted by our strategic decisions. This certainly meant that every client received our individual attention but the process was fraught with stress and difficulty.

I recall many times when we worked through the night, collating all the dealing which we deemed necessary and which, in an ideal world, we should probably have done a day or two earlier had our systems allowed it. The problem was that any decision, say, to reduce exposure to Japan, which had fallen some 12%, in favour of an opportunistic exposure to Hong Kong, which had fallen more than 50%, involved a real decision on each client’s individual portfolio. This was because every single client had a slightly different Japanese exposure, depending on when they joined the service and which Japanese funds were favoured at the time. This scramble to re-balance portfolios rarely involved an examination of each client’s Capital Gains Tax (CGT) status because there just was not enough time to take that into account. This could always be justified by not allowing the ‘tax tail to wag the investment dog’.

The rise of the model portfolio
The result of that 1980s stockmarket fallout was a move by investment managers to convert these bespoke portfolios into ‘model’ portfolios, where clients with similar objectives and attitudes to risk held identical but suitably scaled portfolios. These were then deliberately managed for investment results and CGT was put to one side. With this new ‘model’ approach every single portfolio could be re-balanced in a trice because they were identical and could be managed via a simple spreadsheet.

Then in 1991 the unit trust regulations were changed, to allow collective funds which contained other collective funds to operate on a commercially viable basis. This was the penultimate step in the evolution of unitised portfolio management via portfolio-style funds. Compared with the evolved ‘model’ portfolios these new collective portfolios offered far greater economies of scale, much keener pricing (because of greater bargaining power) and complete freedom from CGT on underlying management. My firm ‘share-exchanged’ most of those 700 portfolios spread across three ‘models’ into three newly-constituted unit trusts launched specifically for that purpose.

The most recent changes to regulations have allowed collective funds to mix and match underlying funds and direct equity investment, as well as to blend a much wider range of asset classes. This means that contemporary portfolio-style funds can now comprehensively and effectively mirror and replace virtually any (far less efficient) individual, bespoke portfolio.

Trust in financial advisers
There may be very good reasons why the Singers should seriously entertain the advice of their financial adviser. The first is that a good local and personal investment management department can be met and ‘eyeballed’ by the client to offer regular reassurance about the style and substance of the management – there is far more accountability.

Secondly a good portfolio manager is not quite the same as a good fund manager. The portfolio manager is running portfolio substitutes and therefore has a keener eye on the overall risk aspects of managing the client’s money. The specialist fund manager works to very tight specifications regarding where they can invest and to what extent they can protect their funds by going liquid (the majority of specialist funds require the manager to remain relatively fully invested within their specialist area since that is the objective of the fund as specified in the prospectus).

A word of warning regarding the current obsession with performance tables. Do not be tempted to buy a portfolio-style fund based on performance tables. The job of a portfolio-style fund is to deliver safe and competitive ‘portfolio’ performance.

This means that individual constituents of the portfolio (the underlying holdings) need to be competitive within their own sectors, from a performance perspective, but the overall portfolio itself is meant simply to offer a sensible and rounded financial lifestyle solution.

Paul Wilcox,
Chairman & Technical Director, WAY Group.

Posted on 9th October, 2009 | Tags: Capital Gains Tax, CGT, IFA |
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