A meaningful reduction in fund costs without a compromise in performance.

We have been conducting a comprehensive review of our investment portfolios in terms of comparison, composition, selection and performance. This review has been made against benchmarks and alternative managers. We wish to share with you our thoughts on how we propose to manage our portfolios going forward. Your thoughts and feedback will be very welcome.

Our existing portfolios are managed on an advisory basis, meaning we recommend any changes and seek your prior agreement before rebalances and updates are made. Clients who do not respond stay in the previous edition(s) until agreement is confirmed in writing. At each rebalancing exercise we review the asset allocation and fund selection for the next edition. These rebalances may include some significant or rather minor changes depending upon the global economy. Our process is as proactive as it can be on an advisory basis, and we will (on occasion) wish to make changes to the portfolios in light of big economic occurrences. However, we cannot act on any portfolio switches without a client’s written consent, which can in turn cause delay.

Over the past 18 years we have developed an advanced comparison matrix tool for the sourcing and selection of funds using Financial Express (FE) Analytics. Our asset allocation tool is powered by Willis Towers Watson via Quilter and we have been using this tool from inception. The Willis Towers Watson asset allocation errs on the side of caution and traditionally holds an overweight position in cash. FE offers us the functionality to test and measure funds from every sector against one another using our selection matrix. Each portfolio is matched to a corresponding risk score out of 10, an expected rate of return and range of returns to two standard deviations.

We currently produce and manage six portfolios running from risk 3 to risk 8 and benchmark each portfolio to the most relevant Investment Association (IA) Mixed Investment sector averages. This is a well-established national average performance measure for funds with similar equity content.

Historically we feel we have, on a risk related basis, performed well against these benchmarks, but we are conscious that for much of 2021 we lagged these benchmarks in our Alpha portfolios.

Our portfolios are split between Alpha portfolios that are made up of active funds and Beta portfolios that are primarily made up of passive index tracking funds. The Alpha range include our Cautious, Conservative Alpha, Balanced Alpha and Speculative Alpha portfolios. The current portfolios have underlying fund manager costs of 0.51%, 0.59%, 0.69% and 0.77% per annum respectively. The Beta range is our Balanced Beta and Speculative Beta. They currently have underlying fund costs of 0.39% and 0.47% per annum respectively.

There has always been a robust debate between investment academics and practitioners over which offers the best option to investors. Many passive funds do perform as well as a large number of active funds but at lower cost. The better active funds do out-perform and earn their higher fees particularly in less developed markets and specialist sectors. For this reason, we feel we have the means and ability to select better performing active funds. Some of these selections are added to the Beta portfolios to add diversity and a partial hybrid approach.
We have over the past 18 years run our portfolios on an advisory basis, rebalancing and updating every six months. This service does not attract VAT so our overall offering is competitive.

The alternative to advisory portfolios is discretionary management. Discretionary management services do attract VAT for personal portfolios but just recently HMRC have removed VAT from managed portfolios and therefore both services are now VAT exempt.

Our sister company Crossing Point Investment Management is a FCA authorised discretionary investment manager. Their portfolios are managed by myself, Tomiko Evans and Mike Buckle. All changes are made without reference to the investor so they can react more swiftly to market changes. This is something that Crossing Point are able to do and often use these permissions to aid returns.

Instrument	3m	6m	1y	3yrs	5yrs	01/06/2018 to 14/04/2022
C Cautious FE Scan 09/11/2021 TR in GB	-1.90	-2.26	-1.23	8.48	17.80	10.34
E IA MIxed Investment 0-35 TR in GB	-3.93	-3.60	-2.62	5.95	9.27	7.02

Instrument	3m	6m	1y	3yrs	5yrs	01/06/2018 to 14/04/2022
D Conservative Alpha FE Scan 09/11/2021 TR in GB	-2.10	-2.74	-1.67	12.82		14.28
B Balanced Beta FE Scan 09/11/2021 TR in GB	-0.59	0.76	3.16	16.73	26.40	18.37
F IA MIxed Investment 20-60 TR in GB	-3.51	-2.36	-0.29	11.44	16.79	12.37

Instrument	3m	6m	1y	3yrs	5yrs	01/06/2018 to 14/04/2022
A Balanced Alpha FE Scan 09/11/2021 TR in GB	-1.92	-2.62	-0.16	22.40	36.42	22.56
H Speculative Alpha FE Scan 09/11/2021 TR in GB	-2.20	-2.90	-1.58	21.98	38.64	22.97
I Speculative Beta FE Scan 09/11/2021 TR in GB	-0.63	0.81	3.58	22.05	32.93	23.38
G IA MIxed Investment 40-85 TR in GB	-3.50	-2.03	0.90	18.18	27.50	19.27

*excluding chart selection

The above performance tables are produced by data from Financial Express Analytics. The tables are a proxy to our actual portfolio performance as they do not include adviser and platform charges nor accurately reflect the actual dates that individual investor portfolios are rebalanced from one edition to another. The rebalance lag could amount to 8 weeks per rebalance. The proxy portfolio performance reflects the fund selection in each consecutive edition of our portfolios.

With our recent Edition 36 selections we underweighted our equity exposure and focused our fixed interest on short dated and index linked credit, knowing inflation and interest rate rises were expected. At that time were not expecting the Russian invasion of the Ukraine but those selections have paid off during this uncertain time. Throughout the past 3 months of hostilities in Eastern Europe and cost of living rises, our portfolios have held up reasonably well against the IA Mixed Investment national averages as illustrated above.

We have made comparisons between our portfolios and it is clear that when comparing the risk related returns over the past one and two years that our Beta portfolios have performed better than their Alpha alternatives. However, over the longer periods that has not been the case.

Usually at times of uncertainty, Alpha portfolios being actively managed, have the ability to navigate a course that should outperform a passive tracker fund. This has however not been the case. Our Alpha portfolios have traditionally been more actively updated and changed as compared to our passive portfolios. Passive funds track indexes so there is little benefit in changing providers for the same index tracking and therefore are more often maintained. The observation here is that less intervention has benefited portfolios and that reacting to events can result in inefficiencies.

The Alpha portfolios have in recent years had more exposure to specialist sectors than the Beta portfolios. These sectors would include such assets as gold, infrastructure, clean energy, technology, insurance, hedge funds, commodities and financials. During an economic cycle differing specialist sector would do well and should be held. Currently we have holdings in gold, infrastructure, commodities and energy as these are relevant for the times. In the past technology stock has been a beneficial holding.

Over the past year the performance of our Conservative Alpha, Balanced Alpha and Speculative Alpha portfolio has lagged behind the national averages mainly as a result of a selection error in Edition 34. We did however make this up during the past three months. Despite this we do want consistently better returns and this has prompted our review of asset allocation, fund selection and rebalancing.

Our overall conclusion is to firstly reduce some of the cash holdings in the portfolio and move this allocation to risk assets. We would expect this move to improve longer term returns. We will in our next Edition 37 hold less fixed interest securities as the bond markets are being challenged by both interest rate rises and inflation. We also wish to adopt a greater buy and maintain position by holding more passive funds across the portfolio range. Our objectives here are to establish active and passive blended portfolios aimed at achieving a more consistent, better than benchmark return at lower cost.

We are therefore proposing that we change our portfolios from their current content and move to a hybrid form of portfolio across the range. We are proposing that we end the separate Alpha and Beta portfolios and in future blend the best of both, but keep fund total numbers to around 30 holdings. The passive section is unlikely to change very much portfolio to portfolio other that in weightings. The active funds will also be maintained if at review they meet our performance and selection criteria. Well selected funds will do this and this has often been the case in our Alpha portfolios. The specialist section will vary by weighting as the economic cycle dictates.

We are proposing an even balance between active and passive funds with each holding justifying its inclusion on selection criteria, performance merit and diversity of asset class. We expect after the first changes there to be less movement at rebalances and more consistent and slightly higher equity weightings to improved longer term returns.

We propose to run five rather than six portfolios as the Alpha and Beta range are merged.

The new portfolios will be;

Portfolio Name	Risk Score	Equity %	Portfolio Cost
Cautious	3	30%	0.43% pa
Conservative	4	40%	0.47% pa
Balanced	6	55%	0.47% pa
Adventurous	7	70%	0.48% pa
Speculative	8	80%	0.50% pa

These new costs of fund management represent an average reduction in fees of 36% on our current range. Our lowest cost portfolio is currently 0.51% pa and the highest 0.77% pa. This change represents a meaningful reduction in fund costs without we believe a compromise in performance.

On top of this proposal.

We wish to extend our investment offering to you further. We will be running these new portfolios on both an advisory and a full discretionary basis. The new portfolios will be established by both Estate Capital and Crossing Point Investment Management. All the platforms we use to hold our portfolios have the functionality to switch with ease between Estate Capital and Crossing Point for the management of your portfolio. Crossing Point charge an additional 0.3% p.a. for their discretionary management for all the portfolios in their range, however for this additional cost, an ad-hoc fund switch can take place more effectively and efficiently than it can for an Estate Capital advisory managed portfolio. A discretionary approach has been beneficial so far this year as Crossing Point used their discretionary permissions and traded out of falling assets and into cash, so protecting capital values. This is not something that Estate Capital has the permissions to do.

I hope you agree with our proposals. Please come back to us with any thoughts, question or queries.

Thank you

Chris Davies APFS
Investment Director

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