Smart Financial’s asset allocation was constructed five years ago with Albion Strategic Consulting. The only change the firm made to Albion’s recommendations was to adopt a zero allocation to inflation-linked bonds.
Smart runs seven risk-rated model portfolios. Albion proposed an allocation to index linkers ranging from 0%, for the highest risk portfolio, to 20%, for the lowest. But the Cheshire-based advice firm could not find a fund with appropriate cost and performance relative to the index.
Tamsin Caine, a chartered wealth manager and head of financial planning at Smart, said: ‘We only use passive funds. When it came to index-linked bonds, we couldn’t find a suitable fund to replicate the index.’
Its conservative, balanced and aggressive portfolios have an 80%, 40% and 20% allocation, respectively, to fixed income markets. The adviser predominantly populates this with short-dated bond funds.
‘We use fixed income as defensive assets,’ said Caine. ‘They are included to reduce the risk of the portfolio associated with investing in equities and dampening equity market falls for more risk-tolerant investors.
‘To avoid introducing currency risk, we use short-term, high-quality global government and corporate bonds hedged back to sterling. Research suggests longer duration, low-quality bonds often behave like equities, and so don’t provide the diversification required from this asset class.’
The firm’s view on asset allocation has not changed with the credit crunch, quantitative easing, the EU referendum, Trump’s election or ‘any other distraction’. ‘It is also unlikely to change any time soon,’ said Caine. ‘I haven’t been hugely surprised by any of the changes in asset class prices, because short-term changes are to be expected.
‘We do not try to predict the markets or the impact of global events on the performance of asset classes. We do not make active calls on asset allocation in varying economic climates.’ Instead, it adopts a buy-and-hold approach, with portfolios rebalanced annually.
The advice firm closely watches the cost of investing. This is the main driver of changes to underlying funds, although changes are rarely made.
In July 2015, Smart changed its main equity fund from Dimensional Multi Factor Equity, used since early 2013, to Fidelity Index World. The latter has ongoing charges of 0.3%, which is 0.35% less than the Dimensional fund.
The firm has no plans for forthcoming changes. ‘We are happy our holdings continue to do their job for the lowest prices,’ said Caine.