David Finn UK Multi-Asset Portfolio Manager
Ben Banerji Portfolio Manager
Fund and Instrument Selection
02nd March, 2022
Portfolio Creation Process
There are four drivers of performance in your portfolio. In this series, we will look at each in detail, providing insights into how we build portfolios.
Fund and instrument selection is the third article in this series. To read the other articles, click here.
The portfolio creation process
Active and Passive, not Active or Passive
Whilst the debate between active and passive management is ongoing and a popular one– we believe that many commentators are asking the wrong questions. At the Davy Group, we don’t ask ourselves whether we should invest actively or passively, but rather try to understand what the best blend of both strategies is for our portfolios.
Multiple studies have shown that the average active manager struggles to outperform passive strategies because of higher fees. However, we believe that it is possible to build a process to identify above average managers that can add value over the longer term.
Different asset classes, regions, and sectors require different skill sets for investment analysts, and for that reason we have a specialist team in charge of our fund selection.
We believe that the building blocks to continuing to find the best managers are to follow a robust and repeatable process. Our process has evolved and improved over time but has at its core a few key elements.
Define the investment universe: The first step is to clearly know what the exposure is that we want and to screen the investable universe for appropriate instruments. We want to allow our managers enough flexibility to make value-add calls, but within a defined investment philosophy to ensure they do not stray from the exposure that we want.
Screening criteria: Starting from a very wide base, we try to narrow our search by applying “must have” criteria to the funds. These can include minimum criteria on track record, assets under management and third-party ratings.
Quantitative analysis: Our quantitative analysis gets us to our short-list of funds for further review. Typical screens that we might use include returns analysis (short and long term), risk analysis, liquidity measures and costs.
Qualitative analysis: From our short list, we set up meetings with the managers and assess them across several qualitative factors e.g., organizational stability, experience of management team, investment process and transparency of data.
Each of these steps feed into a proprietary scoring system that enables us to look beyond the traditional metrics to gather a real understanding of the fund manager.
Once our Investment Selection team have conducted their search and identified the preferred manager, it is brought up to the Investment Committee for an objective review of their findings before ultimately being decided upon for the portfolios.
Given our scale, the Davy Group has unparalleled access to a broad range of fund managers, on a level with most global institutions. This unique access allows us to thoroughly assess potential investments before they are added to portfolios. In addition, we recognise that when selecting third party managers size can be the enemy of outperformance and while large enough to obtain fee concessions and fund access, we are not so large that we are excluded from accessing managers who employ higher conviction strategies or who have capped the size of their funds.
Our investment selection function has been an important driver of outperformance in our portfolios, but more than that, it helps us to avoid risks. As more and more popular funds have been gated, closed, or reviewed as not providing fair value to investors, we are encouraged that our platform has avoided incurring any of these issues for our clients.
Investment Overview
Investment principles
Our investment selection process is guided by four key investment principles that relate to cost, active management, due diligence and time horizon.
Identifying the best opportunities
Our primary objective is to add value to client portfolios by identifying the optimal solution to capture exposure to an asset class/market segment.
Structured investment process
We believe in applying a structured investment process involving rigorous due diligence, robust debate and ongoing monitoring of recommendations.
Scrutinising investment decisions
All proposals are vetted by our Investment Committee, which is made up of the most senior investment professionals who analyse and challenge the recommendations presented.
If you would like to hear more about how our team of investment experts can help you build an investment strategy to meet your goals, please contact our office on +44 (0) 2890 310 655 and request a call with one of our Davy UK Wealth Managers.
To read more about the four sections of the portfolio creation quadrant, click on the articles below.
Strategic Asset Allocation
Your most important decision, how we help you arrive at an appropriate allocation and the implications for your long-term objectives.
Style Factor Bias
The group of characteristics that we look for in the stocks that underlie your portfolio.
Instrument Selection
The final part of portfolio construction, the individual instruments that convey our views.
Tactical Asset Allocation
How we invest your money with shorter term risks and opportunities in mind.
WARNING: The information in this article does not purport to be financial advice as it does not take into account the investment objectives, knowledge and experience or financial situation of any particular person. You should seek advice in the context of your own personal circumstances prior to making any financial or investment decision from your own adviser.
WARNING: Past performance is not a reliable guide to future returns and future returns are not guaranteed. The value of investments and of any income derived from them may go down as well as up. You may not get back all of your original investment. Returns on investments may increase or decrease as a result of currency fluctuations.