As we enter the second year of Assessment of Value reports now required by the regulator from the authorised funds sector there can be no doubt that the regulator has a close eye on value in the industry. It is very conceivable, perhaps even desirable, that the concept may spread further.
After all, within the FCA’s Conduct of Business Rules there is a clear requirement for advisers to consider the costs involved when selecting a product or service for a client. That does not necessarily mean that the cheapest option has to be selected but It does mean that an adviser must be very clear as to why they are selecting a similar but more expensive option and how that will be to the benefit of their client.
Value is of course subjective, to a degree, but of the three components which generally make it up, cost, performance and service, cost is the only factor which can be accurately identified and controlled in advance. Performance, as we all know, is impossible to predict accurately and consistently.
Whilst Evidence-Based Investing is not a new concept (Sparrows Capital’s family owners have run their money this way since 2008) it does have many characteristics that align it very well with today’s focus on value, not least by the industry Regulator.
Evidence-Based Investing applies the lessons of over a century of investment history, systematically and unemotionally. The discipline is practised by some of the world’s largest sovereign wealth funds and pension funds, most notably Norway’s $1trn Government Pension Fund Global and Japan’s $1.5trn Government Pension Investment Fund.
Conclusions from historical data are incorporated into the process only where these are backed by robust evidence derived from academic studies. This approach reveals six key findings which inform the investment approach at Sparrows Capital:
- Return is primarily a function of risk: Allocation of risk across asset classes and geographies explains over 90% of portfolio returns and is the single most important decision in the investment process.
- Certain risks attract a persistent premium: The market has historically awarded a persistent risk / return premium to certain risk categories. A factor-based approach favours these categories with a view to improving performance across the full market cycle.
- Stock picking and market timing seldom add value: Alpha is elusive. We believe that the appropriate objective for most investors, at least across their core portfolio, is to achieve the market return across a diversified asset mix.
- It is important to remain invested across the full market cycle: Trying to time the market can be costly. Some 90% of market returns are typically accounted for by only 10% of trading days. Missing any of these days can significantly affect long term returns.
- Diversification improves risk-adjusted performance: Diversification acts to reduce portfolio volatility, generating a risk reduction benefit without sacrificing long term expected return.
- Cost control is critical: Evidence-Based Investing uses low-cost index funds and ETFs, and produces very low turnover rates
Evidence-based investing, the efficient harvesting of market returns, has been shown time and again to provide consistent, explainable outcomes. These results often come with a reduction in investment risk.
An objective, systematic, rule-based approach removes the behavioural bias associated with traditional investment models, eliminating the risks and distortions associated with market timing bets.
Evidence-based investing is also very cost effective. It substantially reduces both management and transaction costs, meaning that the performance benefits are accompanied by cost savings to produce a compelling value proposition. This virtuous circle has not been lost on some of the world’s largest investors. Through SCore MPS we are effectively democratising an institutional process for the benefit of retail investors. The development of platform services has provided the ideal technological delivery mechanism, again at low and reducing cost. It allows for the efficient separation of function between adviser, investment manager and custodian while providing high quality reporting and access for the end client.
Sparrows Capital have combined the value proposition delivered by Evidence-Based investing with an innovative pricing model developed alongside detailed research with The Lang Cat in 2019. This showed a very high demand from advisers for a departure from the traditional asset-based pricing process for model portfolio services.
The result was a pioneering development in value from the DFM sector, SCore MPS, the first capped fee DFM MPS priced on a per client basis at 0.1% pa capped at £20 per month with no VAT.
Factor tilted and Responsible portfolios are available with asset allocations from zero to 100% equity exposure, rising in 10% increments thus providing for all ATR client outcomes. Risk mapping is by Defaqto.
We would suggest that is a demonstration of good value and, to go back to where we started, that will be a key focus for regulators, advisers and, of course, investors,