A question we often receive is what is the performance of our models. We, therefore, wanted to take the time to write about performance generally and also expectations around portfolio returns. As investing at its very core is sacrificing spending today in order to allocate money to an asset that has the potential to grow in the future, we believe it’s absolutely correct for clients to ask what our performance is. Although past returns are no guarantee of future performance, having an idea of the types of returns that a certain model portfolio has offered provides context and understanding around the risk and returns of an asset allocation. So we wanted to highlight the following points:
Given rules by our regulator, the FCA, we are unable to publish performance on any model portfolio that does not have 12 months of performance numbers. We launched our service initially with our investment plan portfolios. This portfolio management style uses modern portfolio theory and inputs from clients to dynamically adjust the asset allocation. This means that the weights in the portfolios change based on how our clients want their portfolios to be managed. Our investment plans do have performance number older than 12 months. However, given that we have hundreds of different models to cover the inputs from clients and the dynamic nature of the portfolio management itself, publishing these returns is not representative of conservative, balanced and aggressive risk profiles. These portfolios are bespoke to an individual and therefore one model’s returns will not be the same or suitable for another investor's risk and return objectives.
We launched our starter portfolios in November last year. This static asset allocation style offers clients the ability to select the asset allocation that suits their needs. The 21 portfolios we offer are broadly divided into conservative, balanced and aggressive risk buckets. These risk categories allow a client to understand, in simple terms, what level of risk suits their objectives. Once these models reach 12 months of performance we will publish their returns. This should provide clients with real numbers with the normal caveat that past performance is not a guide to future returns.
When clients log into their portfolios they will see a tab under the goal section labeled projections. This allows someone to input an amount they plan on investing as well as the monthly contributions and get a projected forecast. We would highlight important disclaimers here. These are only estimated that in no way is meant to represent or predict actual returns. We certainly do not claim to know the future. However, what we offer with these projections is an idea of the range of potential returns that the asset allocation you have selected could potentially offer in the future.
We are working firstly on providing line by line performance attribution so that existing clients can have a better idea of what ETFs and asset classes in their portfolios are driving their returns. We are also looking at providing simulated past returns on our model portfolios so that new clients can have past simulated return and risk numbers to hand. This will hopefully provide more clarity and transparency and assist clients in choosing an asset allocation that meets their risk and return objectives.
Performance without question is important. The entire reason for investing is to ensure that the funds sacrificed today grow over time. We also know that using performance, a hard number that everyone can understand, in judging a new digital investment manager in what it has to offer is completely natural. As we wait for 12 months of returns on our starter portfolios, but also going forward, we will continue to encourage our clients to think of performance in terms of the asset allocation and therefore risk they have selected. Clients, we understand, want the highest returns possible. However, the important thing to note is that we spend a lot of time writing about and showing how active management fails to beat benchmarks.
How passive investing (using ETFs), statistically has offered better returns than many active funds. We are not an active fund manager. Therefore we do not take active positions in the market or forms investment views. We allow our clients to select from three portfolio management styles and hundreds of different static and dynamic models in three currencies. We then build their tailored asset allocation with ETFs. This means that we encourage our clients not to think of us as a black box that uses technology to provide portfolio management. Rather, a completely transparent investment management solution that can be tailored to your needs.
This means that it is important to select a portfolio management style and asset allocation that suits your long term investment objectives. As we provide market returns (we use ETFs), the asset allocation (your combination of equities and bonds) you select will determine the types of risk (volatility) and returns of the portfolio. Selecting an asset allocation outside of your willingness to take the risk, as well as your ability, means that even if a portfolio provides returns that exceed your expectations when losses do occur they are likely to be outside of your tolerance.
Performance should, therefore, be viewed in terms of taking the amount of risk you are comfortable with. This means that even when markets and asset classes are offering fantastic or poor returns, the level of risk in your portfolio (the mix of asset classes) is in line with your capacity for loss. Of course, we all want phenomenal returns in our portfolio. However as we are taking the passive market risk (ETFs), the returns in our portfolios will be in line with the asset classes and markets we invest in. It is therefore not a case of the highest level of returns but more what combination of asset classes (markets) will provide an investor with the types of risk and returns they are willing to take.