Anchors, Diversifiers & Enhancers…

A Portfolio’s asset allocation policy is the primary determinant of returns – as identified by Nobel prize winning research.

Our first step is to determine the long-term capital market expectations of returns, volatilities and asset class correlation. This determines the strategic asset allocation of the fund.

The process is based on Black and Litterman’s portfolio theorem and uses a forward-looking return model. This is widely accepted among investment professionals as a primary determinant in the long-term performance of a fund.

Thus, our focus is on getting the asset allocation structure in place – with reference to the asset class definitions of Anchor, Diversifier and Enhancer attributes.

Simply put, for any individual portfolio, we change the principal allocation to these major asset classes depending on the performance objectives.

For example, a lower return portfolio will allocate more assets to anchor assets and fewer to enhancer assets and, by the same token, a higher return portfolio will hold more enhancer assets.

The Asset Types

Anchors

Anchor assets form the cornerstone of risk control and are typically fixed interest instruments, which demonstrate low volatility and generate stable income.

Diversifiers

Diversifier assets aim to achieve total returns and add a further layer of risk control by being uncorrelated to equity markets. Such equity investments are the traditional engine room of medium to long-term growth but are also more volatile in nature over the short term as they react to positive and negative influences in global markets.

Enhancers

Equities, whether public or private, developed economy or emerging markets are termed Enhancer assets.

Having determined the portfolio asset allocation we then invest directly or via other managers’ funds in the following major asset classes and their component sub-classes:

Fixed Interest

Fixed interest Investments are the largest means of raising capital globally.

This asset class can be split into an enormous array of sub-asset classes.

  • Gilts
  • Local Government Bonds
  • Corporate Bonds
  • Eurobonds

Bonds are designed to provide secure returns.

Equities

Equities, or company shares, signify an ownership position in a corporation.

Shares in a company can be bought and held by anyone. Many of the large UK companies have many millions of shareholders, and many of the UK’s largest companies are actually owned by large pension schemes.

Equities are widely achknowledged to have provided the best long-term performance of the main asset classes.

Alternatives

Include hedge funds, PFIs and commodoties as well as physical assets other than property

We recognise that there are many alternative asset classes that are largely underused by other investment managers.

Uncorrelated assets such as commodities and hedge funds can enhance portfolio diversification for risk management and provide absolute returns.

Property

Property has experienced phenomenal growth periods, but can also plummet in recessions.

Property investors saw major returns during in 1990s and early 2000s, yet values fell sharply during more recent economic events. It nevertheless remains an important investment instrument, and has the added benefits of being both a tangible asset and one of the more understandable asset classes.

Cash

Cash is an important part of any portfolio, primarily to produce some instant liquidity

Holding Cash ensures there is always an allocation that enables us to have a small amount of funds available to cover charges and other expenses, which needs to be managed effectively with all investments.