Ten years ago County Durham-based Eldon Financial routinely used active managers in its clients' portfolios. But after some thinking it converted to a now almost wholly passive proposition.
The arguments used by passive converts are already well-worn: managers do not consistently outperform and do not justify higher costs. But how has Eldon fared after a decade as a passive planning firm?
‘We moved from active to passive back in 2009 after a couple of years of research,’ said Jon Bean (pictured above), chartered financial planner at the next gen firm. ‘It really reinforced what we thought for a couple of years, which is passive is lower cost, lower turnover.'
Under the tutelage of managing director Tony Conners and director of client services, Gemma Siddle, Eldon has shifted its focus to passive passive portfolios but with a tilt towards smaller companies.
‘What we want to do is get the value from those smaller companies, which will provide increased returns over time,’ said Bean.
‘We also don’t think active managers can consistently outperform the index. If you are paying for alpha and not receiving alpha consistently, don’t pay for it.’
Eldon has 10 model portfolios risk-rated from one to 10, although they can be blended to produce, for example, a 7.5 at the client’s discretion. The ongoing charge ranges from 0.3% to 0.34%. The funds contained within the portfolios remain the same with asset allocation shifting accordingly.
At the core of the firm’s passive strategy are Dimensional and Vanguard funds, which it uses for all of its UK and overseas exposure.
Bean explained: ‘We use Dimensional as value in smaller companies funds, and also use the Emerging Markets Value in our emerging markets exposure, along with the Vanguard Emerging Market Index. Dimensional is the value side, but Vanguard is the core within emerging markets.’
The firm’s only active allocation is within commercial property, where it uses three funds in equal weighting. Bean added: ‘If we could get something there that fit the bill, we would, but we are looking for bricks-and-mortar exposure. We don’t want to use what are essentially equity funds for commercial property exposure.’
Buy and hold
Key to Eldon’s strategy is not second guessing the market. ‘What we don’t want to do, and we saw this before the EU referendum, is take a tactical position. I don’t think you can consistently do that,' said Bean.
‘You might bet right once. You might call the market or time the market but, given all the evidence, it’s time that does the work. “Buy and hold” sounds a bit too simplistic, but we like to construct portfolios that can weather all investment markets, without trying to dip in and out and second guess.
‘The asset allocation drives the return, remaining in the market drives the return, and if you accept those factors, you can focus on driving down cost. If we are getting the market return for a very low cost, we are happy.
‘There is still a tilt on that, we’re still looking at value and smaller companies because we think there is a premium there, but we’re not looking to try and second guess it.’
Bean added: ‘Fixed income exposure is there really to mitigate risk, to reduce volatility rather than drive a huge return. It is essentially a buffer.’
Although the firm does take cash into consideration when offering investment advice, it does not hold cash in any of its portfolios, because clients tend to hold cash outside of Eldon’s direct management.
‘If you’re charging on assets under management, then charging on cash in a low interest environment where the client can get a better return elsewhere feels a little disingenuous,’ said Bean. ‘We have to ensure we have a good relationship with the client in that they feedback what they have in their cash reserves, but we do that as part of the review process.
‘So we do take cash into consideration when looking at the asset allocation, but it’s not within the models as we don’t think we can justify that with the return.’