Bloomsbury Wealth branch principal Carolyn Gowen works by the factor-based investment philosophy of Dimensional Fund Advisors, which she says has rigorous academic support.
The popularity of Dimensional can hardly be exaggerated. In the first three quarters of 2013 it reported $16.7 billion (£11.9 billion) of new assets. This was more than the company had ever received. Then, in October 2013, Dimensional’s director and consultant, Eugene Fama, won the Nobel economics prize for developing new methods to study trends in asset markets.
Dimensional now has $548 billion assets under management, and Gowen is one of its devoted followers. The firm uses Dimensional model portfolios for clients, based on their individual risk profiles.
To obtain a client’s emotional tolerance to risk, London-based Bloomsbury uses FinaMetrica. This service incorporates psychometric risk tolerance testing, an assessment of capacity for risk and the need to take risk.
‘Ultimately, emotional tolerance has the highest weighting. You may be able to alter your goals, but you can’t change your emotional tolerance to risk,’ Gowen said. ‘Investor behaviour is the biggest destroyer of returns. Our job is to ensure people invest in a portfolio with a volatility they can emotionally tolerate.’ Someone with a FinaMetrica risk score of 53-58 would suit a portfolio of 50% equities and 50% bonds.
Bloomsbury, which has discretionary permissions, will then rebalance each portfolio back to the model asset allocation. An arduous task perhaps, but Bloomsbury has relatively low client numbers for a firm its size: 66 clients at the end of 2017.
Fellow branch principal Robert Lockie monitors the fund prices on a monthly basis. Rebalancing normally happens twice a year. ‘Market movements will count for one and I look at everybody’s portfolio towards the end of the tax year,’ Gowen said.
Each portfolio is measured against an individual’s risk tolerance. To give clients an idea of what they can expect, Lockie creates simulated portfolio returns.
These show a simulated return history from the 1950s to date. Lockie said: ‘This involved a significant amount of time originally, as they had to account for the fact asset classes we buy now weren’t investable in the 1950s. And even where there is data, it is often from a no-cost index. So the simulations allow for what would have been reasonable proxies at the time and also include an allowance for the costs of funds, custody and our advice. If you leave these out, it obviously makes the figures look better, which seems very unsound to us.’
Bloomsbury says it considers these simulations to be a ‘fair and worthwhile exercise’ in understanding the portfolio a client has been recommended. And it does seem this method of considering historical returns tallies with the Dimensional philosophy. ‘How do you identify managers who are skilled rather than lucky and stick with them, when you’ve got a 40-to-50-year time horizon on your investment?’ Gowen asks.
For a firm expecting to have £200 million assets under management, and 98% recurring income, this year, the Dimensional philosophy seems to be working.