Do you need to be a big firm to make an actively managed fund offer work for clients? Tandem Financial director Paul Cleworth runs a five-person business in Luton and the cost of active funds for the business is prohibitive.
‘I don’t like active funds,’ says Cleworth. ‘I would have to employ more staff to do the job properly and potentially charge the client more, and the underlying fund costs more. Unless you are a chartered financial analyst and familiar with how to pick stocks or how to pick funds and you have got a qualification in it or a lot of experience, there is no chance you can do it.
‘In my view most advisers look at how funds are rated and the back-dated performance…and say this is exactly the fund to be in, and six months later they will say: “it wasn’t a very good fund I will switch it”.’
Another gripe he has is the use of composite benchmarks by advisers when trying to show the performance of their portfolios.
‘People say: “I have got this portfolio, it has got this amount of active funds, this amount of passive…” very few people compare it against the FTSE All Share. They tend to use a specific poorly performing index that tends to show their portfolio performing slightly better. Fund managers are guilty of this is as well.
‘They show you some crap benchmark and will never show you the fund that has done badly – they will only promote the good ones.’
Tandem Financial uses seven self-constructed advisory model portfolios, with many of the funds coming from Dimensional and Vanguard.
Cleworth says these Dimensional funds have a slight tilt towards small-cap companies, profitable firms and value investing. One of the funds he likes is Dimensional Global Small Companies (see graph below), which he uses to provide exposure to small companies around the world, including the UK. This fund does have an active element to it, and has been underperforming its chosen benchmark over five years.
The best performing fund he uses is a global, large-cap fund, the Vanguard FTSE Developed World Ex-UK Equity Index.
Cleworth says the performance of this Vanguard fund highlights the benefit of having a well-diversified global fund across a number of different geographies, which means clients’ risks are spread out. It is also, he says, a reminder that investing is a long-term game.
He likes both Vanguard and Dimensional because of their low charges and because they are very large private institutions.
Don’t time the market
Although Cleworth does not believe in trying to time the market, there have been occasions where he has employed tactical rebalancing depending on the market conditions.
An example he gives is in early 2017 when he sold out of the Legal & General Index Linked Gilt fund, which invested in UK corporate and government bonds. Cleworth says he sold out of this fund because he was concerned rising UK interest rates would lead to a price correction for the fund because of the long duration of the bonds it invests in and its UK focus.
He switched clients into the Legal & General Global Inflation Linked Bond index because he wanted more international exposure for fixed income allocation and bonds that had shorter maturity dates.
Cleworth thinks asset allocation should also be simplified. He says you only really need to invest in two classes: equities and bonds, with some money held in cash. The property fund he invests in, iShares Global Property Securities Equity Tracker fund, does not invest directly in properties, but is a property share fund.
He also thinks clients should not be invested in a lot of funds because there will be ‘massive overlaps’ between the funds’ strategies and this will confuse to the client. He uses 11 funds in his portfolios for diversification and feels that is a good number.