As 2020 recedes in the rear-view mirror there are, of course, lessons to learn but there are new opportunities to embrace too. In a year of general introspection, we took a good look at the way we do things because we are always keen on finding new ways to give you the best possible service.

In this newsletter we’d like to tell you about our new approach to rebalancing your portfolio, which is the culmination of our own research into what really works for you. We’re also taking a look at a strategy known as ‘factor-based investing’ and we’ll see a snapshot of how one of our WRAPS portfolios fared over the last 12 months.

Improving the way we rebalance

When we start working with you we build a portfolio that’s designed around you and your goals. To make sure it’s best placed to deliver the results you want, at the level of risk that’s right for you, and we pay close attention to your asset allocation – the proportion of your money that’s invested in different asset classes.

As time goes on asset allocation will drift because changes in the market mean that as different assets rise and fall in value, they’ll make up more or less of your portfolio. It’s a bit like topping up your gin and tonic with just gin (or just tonic) – the ingredients are the same but the ratio is wrong. That’s where rebalancing comes in, steering your portfolio back on track, ensuring it stays true to your risk profile, while keeping volatility to a minimum and enhancing your returns.

Rebalancing in itself needs a balanced approach – rebalance too little and your portfolio will drift, but rebalance too much and the benefits are hampered by the costs and time involved. We carried out our own research to find the ‘sweet spot’ for improving returns without excess volatility and it showed us that, although rebalancing every year works well, we can actually get better results for you by only rebalancing when your equity:bond asset allocation ratio strays more than 10% away from your model allocation. It’s a more efficient way to hold money, it reduces administration and makes for better longer-term returns, with an improvement on average of 0.07%, which definitely adds up over time.

What that means is, you’re rebalancing only when you need to rather than out of habit, which in practice means you’re more likely to be rebalanced every three years, rather than annually. Of course, we will still review your funds regularly (as you know, we don’t change funds often, but we’ll always keep you updated if anything changes). We call this our Responsive Rebalance Approach.

Factor-based investing

The word ‘factor’ crops up all over the place, often standing in for something that’s a bit ambiguous or unquantifiable, something you can’t quite put your finger on – the X-Factor, the feel-good factor (even the Krypton Factor if you’re old enough to remember that one).

But what of ‘factor-based investing’? Here, the ‘factors’ we’re talking about are specific, quantifiable and shared. They are the different characteristics and properties that give rise to common patterns of behaviour and returns across broad sets of securities. Factor-based investing, or ‘smart beta’ investing, centres on targeting these factors and while there are hundreds to work with, among the key ones used in factor-based investing are ‘value’, ‘size’, ‘volatility’, ‘momentum’ and ‘quality’.

The idea is to build in diversification with a specific goal in mind, deliver above-market returns and manage risk. As ever though, this approach demands discipline and the ability to stick to your plan, through thick and thin. You can learn more about factor-based investing, what it is and how it works in this video with Morningstar’s Ben Johnson.

WRAPS performance

Finally, in the spirit of staying calm in the face of adversity, we’d like to draw your attention to the performance of WRAPS portfolios last year, using the moderate portfolio, which you can see in the snapshot below.

Last year, the moderate WRAPS portfolio achieved an average return of 6.8% across the whole year. Now, that’s not to say there weren’t ups and downs, which you can see quite clearly around the April 2020 point. But beyond that, the portfolio came back to finish the year strongly, with an average return that isn’t too far removed from what we’d expect in an average year.

The key takeaway here is that, of course, last year wasn’t an average year and, of course, values took a tumble, but they recovered once again and that really underlines our constant message of the importance of long-term investing. We often tell you how crucial it is to set up your plan and stick to it, that there’ll be ups and downs along the way, but that over the long-term values will climb.

While there are many lessons from 2020, both financial and otherwise, probably the most important lessons when it comes to your money are to believe in the markets and to stick to your plan.