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We always try and bring you the major players in the world of investment and this month is no different, we are delighted to bring you the thoughts of Justin Urquhart Stewart of 7IM who provide Investment Sense with our pre selected funds. We started by asking Justin about his and 7IM’s history:
7IM are well known to financial advisers and clients, however I think many of our readers would be interested to know a little about your history.
In 2001 the 7 of us came together because we were all thoroughly fed up with the way that the investment industry was operating and looked for a better way to run our own family monies. If you wanted to have a common theme it would be to “do the right thing” and that it was a privilege to look after people’s money and not a right. Maybe a little corny but compared to what we saw in the investment world there was a need for a more radical piece of common sense. After building, we went live in 2002, offering institutional style investment services for professional advisers and planners and have grown ever since and now have the privilege of looking after over £2.6bn for their clients.
We believe that planning comes first – “if you are planning to invest, don’t, invest in planning.
Personally, having trained as a barrister I swiftly realised that this was not a world for me – in fact I am sure I would have made one of the UK’s worst barristers. My pupil master pointed out that there was more money in crime than defending it! On that basis I went into corporate banking.
I joined Barclays Dominion Colonial and Overseas to learn international corporate banking and had a series of fascinating postings in Africa and the Far East. This led me back to London in the run up to The Big Bang in 1986 where as part of the BZW we set up a joint venture, Broker Services, which went on to become the largest stockbroker in the UK and eventually became Barclays Stockbrokers where I was Corporate Development Director. There I worked with Tom Sheridan, Graham Stott and Wendy Magill as well as others who are now with us at 7IM and in fact our senior dealer Richard Lovesay has been with me since 1987. That level of continuity as a team provides us with a great sense of mutual trust and confidence, so vital in fast moving and erratic markets.
In the meantime I try and keep my ageing motorcycle going and harbour and old intention of spending time doing more archaeology, that is before I become an artefact.
What is your specific role at 7IM?
A good question and one that I have ducked successfully from answering for many years. I suppose my role has been to raise the profile of 7IM and try and give us a level of awareness probably greater than our size would normally allow. I also chair our Asset Allocation Meetings where, even with my decades in the industry, I never cease to be amazed at the level of expertise and knowledge amongst this astonishing group of experienced and talented investment professionals. If I have one focus it has been to try and demystify the fog of complexity that our industry wallows in. We seem to have lost focus and often forgotten that we are in a place of great privilege – we have been asked by clients to look after their hard earned money. That is one hell of a responsibility which we should all remember.
You have a wealth of experience when it comes to investing, what ‘golden rules’ or tips would you pass onto our clients?
Rule 1. As I mentioned just now, planning comes first, “if you are planning to invest, don’t, invest in planning.”
Rule 2. A broad and thorough process of ongoing asset allocation. This means broadly diversified assets but also measuring their volatility – if you can manage the volatility you will then have a greater chance of predictability. It may be dull but it works. How do you get rich? The answer is slowly and steadily. Don’ t try and shoot the lights out as you will spend all your time looking at the sky and miss the fact you are about to fall down a hole.
Rule 3. Time. once you have set up your investment programme then let it run. A minimum of three to five years in my view. That doesn’t mean you don’t do anything with your holdings, as regular asset allocation will mean that you will make certain tactical adjustments. The main thrust though is to let the asset classes revert to their mean longer term performance and you will see the longer term returns.
Rule 4. This year’s fashion fad is next year’s tank-top. Avoid what is hot, because it’s not!
Rule 5. Watch out for the hidden costs (Total Expense Ratios or TERs). This is the hidden cancer that can eat up your performance without you even knowing about it.
Rule 6. Tax wrappers enhance investments, not the other way around. A stale Mars bar in a nice wrapper is still a stale Mars Bar.
Rule 7. If you don’t understand it then don’t do it, along with if it is too good to be true then it probably is. It’s not you being dim, it’s probably the person trying to persuade you to do it and can’t explain it.
Funny there seem to be Seven key rules?
It is very clear that much of 7IM’s time is spent looking at asset allocation, can you explain a little more about why you believe that this is so crucial to successful investing?
Just pump “asset Allocation“ into Google and you will come up very quickly with numbers showing that between 85 & 95% of historical returns seem to be down to asset allocation. It’s not that stock picking and market timing are unimportant, but if you are in the wrong asset class to start with, then there is going to be trouble.
The key point is to get the bigger picture sorted out first. So the planning with the client is pre-eminent, and thereafter choosing which asset classes in what proportion and only then get down to fund or stock selection. If you do it the other way around then you are in serious danger of putting the client at greater risk than they actually wanted.
By having a broad range (at least 10) of asset classes, we can establish their historical performance (but can’t rely on it) but more importantly know their volatility. Now blend the volatility together and we create a far more predictable model – even over the past five years.
That’s why asset allocation is not just important, but is vital.
Investment Sense uses the 7IM AAP funds for those clients who buy direct from us and don’t want to select funds themselves, can you explain how investment decisions are made with these funds, what they invest in and what was your aim when 7IM set them up?
The key purpose of our funds is to provide the adviser and their client with a disciplined institutional investment process. Therefore we have built a structure designed to focus all of this expertise onto the clients’ portfolios each and every day.
We have structured this with a core and overlay approach. The strategic holdings at the core (50-60%) of the portfolio, have a long term view. and the tactical holdings in the remainder of the portfolio, the overlay, (40-50%) are decided once the Asset Allocation Committee meets and discusses their short term (3-12 months) views of global economies. So the portfolios have a stable core based on long term data but also a nimble, shorter term overlay that enables us to keep the portfolios up to date and take into account current world events.
Additionally we have built in an “attribution analysis” whereby a third party (The WM Company, in Edinburgh) validate our asset allocation decisions to see what impact they have. This again is an institutional discipline which pension trustees would expect to see and we believe that this is going to be more important for advisors and planners so that they can have confidence in the process operating for them.
Clearly the 7IM AAP funds invest in passive instruments such as Trackers and Exchange Traded Funds (ETFs), you also run funds that invest in actively managed funds. The debate between active and passive investing continues and probably will do for a long time to come, what is your take on the two styles?
There are some very good active fund managers – and there are some awful ones!
The challenge is finding those consistently good ones. Figures certainly show that approximately 70-80% of active managers can’t beat their own benchmark, which would imply that we should just buy the benchmark, the index.
However these figures can be unfair on good active managers who can perform very well when their sector or focus is making progress, but struggle when their area is out of fashion.
Equally ETFs have some great benefits, both in terms of cost and swiftness of access as well as helping with very precise asset allocation. I have always been amazed at how slowly they have been adopted here in the UK, but few intermediaries were even told about them, as active management firms would obviously dissuade them, and stockbrokers often saw them as an insult to their knowledge of individual stocks!
We have taken a view that both active and passive approaches have their merits and run both our blended Multi Manager funds and our AAP (Asset Allocated Passives) funds which primarily use ETFs and other Index Trackers and more recently direct holdings of baskets of stocks to further reduce the cost to the investor.
How have the AAP funds performed since they launched?
The performance of the AAP funds has been good given that they were launched just before the worst bear market since the Great Depression in the 1930’s.
Rolling 1 year performance to the end of April 2010 for the D class (Retail) of the AAP funds was 15.64% for the CF 7IM Moderately Cautious AAP fund, 20.93% for the CF 7IM Balanced fund, 25.96% for the CF 7IM Moderately Adventurous AAP fund and 30.50% for the CF 7IM Adventurous fund.
Moving on to the wider picture, how do you see the UK economy performing for the rest of 2010, and what effect do you think the General Election result will have?
The new government has laid out a clear intention to reduce costs and raise certain taxes in order to show the world that the UK is determined to address the deficit. Despite the bravado of deep cuts, what is needed is a clear plan for a longer management of the finances back to balance and the economy onto a more certain path for growth. The initial cuts whilst sounding substantial are but a drop in the bath if not an ocean but at least a start has been made.
The other area which I hope there is more focus on is that of the smaller to medium sized companies. This is an area of key development for the UK and is second largest employer after the Government. If we can remove much of the bureaucracy from smaller businesses and improve the banking structure, then they can flourish and especially those involved in exports. Let’s be clear we still manufacture a lot, we are the world’s 6th largest, but we need to rebalance the economy back from the service and consumer sectors to provide a greater emphasis on manufacture and industry.
However, this is also an opportunity for a reforming government to bring in some more radical ideas especially around savings and pensions, and to help us return to more of a savings culture for the longer term and depend less on the vagaries of the consumer.
Yes we are in for a decade of austerity, but one sadly we probably deserve in order to redress the excesses of the last decade. However, such a time is great opportunity as well for professional planners and advisers to provide the vital professional advice, support and trust which all of us will need.
