You might sometimes be able to time markets successfully. But trying to do it consistently over longer periods is futile. That was the conclusion of Warren Shute, director of Swindon-based Lexington Wealth Management, in a dissertation for his master’s in financial planning and business in 2011.
It confirmed Shute’s firm’s long-held commitment to 100% passive investments in portfolios, with tilts towards small cap and value factors. ‘My aim is to get the best result for the client,’ he said. ‘Often they don’t need more money; rather, they want more happiness or security. If I have a proven, academically-backed investment strategy that eradicates variables, such as how a fund manager might perform, then I improve the odds of achieving the aim.’
Shute belongs to a group with five other advisers from around the country called the Trusted Adviser Group. They meet quarterly to exchange best practice ideas and once a year to discuss investment, where it becomes his investment committee.
Lexington runs six portfolios with asset allocation based on 20% increments of equity holdings. The geographical element of equity content is based on the market capitalisation of each country or region. The two main fund selection criteria are charges and diversification. Two of the most popular funds are the Dimensional World Equity fund and the Dimensional Global Short Dated Bond fund.
The portfolios are benchmarked to the retail price index. ‘My outcome with the client isn’t to get outstanding performance,’ said Shute. ‘It is to make sure the portfolios are commensurate with their risk tolerance and capacity. Providing we are beating inflation, one of the biggest killers of money, if clients don’t need more risk, why accept it?’
He added he expects inflation to keep rising. The Lexington 80% Equity portfolio fell behind inflation and the Adviser Fund Index Balanced benchmark briefly in 2016, due to the downturn in equity markets. But it has outperformed both significantly in the three years to November 2017.
Lexington has no dedicated income or ethical portfolios. ‘If clients need an income, we use a cascade approach,’ said Shute. ‘That keeps three years’ income in cash or near cash; the next five years in a low-risk portfolio, such as 20% equity; and the balance in growth. Then we cascade that down.’ This means as the cash is spent, it is replaced with money from the low-risk portfolio, which, in turn, is topped up from the growth portfolio.
He adds he is happy with the two factors of value and small cap, plus the profitability filter that Dimensional often uses. Shute does not hold any other factor-based strategies.
A common criticism of index investing is, when markets go down, there is no way to avoid portfolios being dragged down with them. This could become increasingly relevant as the global economy reaches the end of its upward cycle, with some fund managers saying markets are already ‘flashing red’.
‘That’s where the risk profiling and asset allocation comes in,’ said Shute. ‘You only put a client into a portfolio with a downside they can tolerate. An active equity fund will fall in value in that scenario too.’
The average total expense ratio on Lexington’s portfolios is 0.47%, excluding wrapper and adviser fee. For ongoing planning, Lexington charges a retainer of £85 to £150 a month. For clients with money to invest, there is a separate additional charge of 1% for amounts up to £2 million; 0.85% on the next £3 million; 0.75% on the next £5 million; 0.5% on the next £10 million; and 0.4% above £20 million.
‘The retainer is for financial planning,’ said Shute. ‘If they invest money, they have additional needs, such as tax calculations and work around the investments. So that is paid separately.’