What is the difference between an SCM discretionary portfolio and a mutual fund?

One of the main differences is that in a discretionary portfolio the holdings are all held in your name, rather than through holding units as happens in a mutual fund.

 
Investors can go on-line at any time and see the full breakdown of holdings within their account, as well as the actual values of the various holdings as at last night’s closing values.

 
It should be noted that there are tax differences between holding a discretionary portfolio and holding units in a fund and you may wish to get specialist tax advice before investing. For those investors not investing via an ISA or SIPP we will provide an annual statement of capital gains and income for clients to enter on their annual tax return.

What is the academic or other research supporting your strategy and philosophy?

Many expert research papers and commentaries over several decades have come to the conclusion that statistically it is almost impossible for traditional active management to outperform the markets.

Time and time again they have found that:

  • costs matter
  • diversification is vital
  • index funds tend to beat more concentrated ‘active’ funds
  • investing based on fundamentals on a long term basis tends to beat attempts to ‘time’ the markets
  • over trading tends to produce disappointing outcomes.

When looking at research from traditional active fund managers or trade bodies often aimed at discrediting such conclusions, you should always remember that the academics strive to draw conclusions from data that is selected objectively, rather than the fund manager or trade body that tends to start with a conclusion and work backwards to find selective data to prove it.

What are the SCM Direct portfolio choices?

We have 3 core portfolios and 3 blended portfolios that are available in 3 currencies.

The GBP portfolios are also available via a NISA or SIPP ‘wrapper’.

The 3 core portfolios are:

  1. SCM Bond Reserve
  2. SCM Absolute Return
  3. SCM Long-Term Return

3 blended portfolios made up of a 50/50 allocation of two of the three core portfolios, which are rebalanced subject to relevant parameters on a weekly basis:

  1. 50/50 Bond Reserve/Absolute Return
  2. 50/50 Bond Reserve/Long-Term Return
  3. 50/50 Absolute Return/Long-Term Return

The 3 core portfolios and 3 blended portfolios are available in 3 currencies – £, US$ or €

The minimum investment levels are:

  • For direct clients our minimum investment level is £10,000 investing in one of our GBP portfolios.

If you are either outside the UK or do not have a UK bank or building society account, the minimum is £100,000.

  • $100,000 if investing in one of the USD $ portfolios
  • €100,000 if investing in one of the EUR € portfolios

3 ways to invest

  •  Direct into the portfolios without a tax efficient wrapper
  •  Via an Individual Savings Account – ISA
  • Via a Self-Invested Personal Pension – SIPP Account (Via Hubwise Securities Ltd)
What are the main advantages and disadvantages of SCM’s investment approach?

The main advantage is that it is highly unlikely we will be bottom as our high levels of diversification, both of assets and securities, will often reduce the highs and lows of more traditional, concentrated funds. We believe that our approach of greater diversification, less costs and a focus on fundamentals are the best tools to ensure long term success.

SCM Direct believes that successful asset allocation relies on a common sense contrarian approach combined with the application of old fashioned fundamental investment valuation yardsticks e.g. price/earnings, yield, price/book, price/cash flow.

SCM Direct endeavors to invest in markets when they are most out of favor and under-valued in order to reduce the risk of being invested in the latest investment bubble or fund manager fad. Successful asset allocation often relies on being contrarian rather than blindly following the herd of investment professionals.

Concentrating on building these actively managed portfolios through the use of ETFs allows SCM Direct a wide choice of asset classes combined with very low transactional and fund management costs compared with most traditionally managed active funds.

The main disadvantage is that we will almost certainly never be top of any table in terms of performance. Another disadvantage is that our approach is extremely unlikely to help anyone ‘get rich quick’ as broad market indexes tend to move up or down less than many individual securities.

Please remember that each person’s tax situation is unique, that ISAs may not be the most tax efficient approach for everyone, and that tax legislation can change in the future. If you are unsure if an investment is right for you, please contact an independent financial adviser.

What are the benchmarks used across the portfolios?

Each SCM Direct Portfolio has its own comparative benchmark.

We believe that many investors are looking for their portfolios to either outperform cash or the inflation rate, so we have used these as our benchmarks.

PortfolioBenchmark

Bond Reserve Portfolio GBP – Barclays Benchmark Overnight GBP Cash Index

50/50 Bond Reserve / Absolute Return GBP – Barclays Benchmark Overnight GBP Cash Index

50/50 Bond Reserve / Long-Term Return GBP – Average of Barclays Benchmark Overnight GBP Cash Index & UK RPI All Items Index

Absolute Return Portfolio GBP – Barclays Benchmark Overnight GBP Cash Index

50/50 Absolute Return / Long-Term Return GBP – Average of Barclays Benchmark Overnight GBP Cash Index & UK RPI All Items Index

Long-Term Return Portfolio GBP – UK RPI All Items Index

Bond Reserve Portfolio USD – Barclays Benchmark Overnight USD Cash Index

50/50 Bond Reserve / Absolute Return USD – Barclays Benchmark Overnight USD Cash Index

50/50 Bond Reserve / Long-Term Return USD – Average of Barclays Benchmark Overnight USD Cash Index & US CPI Urban Consumers NSA

Absolute Return Portfolio USD – Barclays Benchmark Overnight USD Cash Index

50/50 Absolute Return / Long-Term Return USD – Average of Barclays Benchmark Overnight USD Cash Index & US CPI Urban Consumers NSA

Long-Term Return Portfolio USD – US CPI Urban Consumers NSA

Bond Reserve Portfolio EUR – Barclays Benchmark Overnight EUR Cash Index

50/50 Bond Reserve / Absolute Return EUR – Barclays Benchmark Overnight EUR Cash Index

50/50 Bond Reserve / Long-Term Return EUR – Average of Barclays Benchmark Overnight EUR Cash Index & Eurozone CPIA

Absolute Return Portfolio EUR – Barclays Benchmark Overnight EUR Cash Index

50/50 Absolute Return / Long-Term Return EUR – Average of Barclays Benchmark Overnight EUR Cash Index & Eurozone CPI

Long-Term Return Portfolio EUR – Eurozone CPI

How often does each portfolio change its asset allocation?

This is not set in stone. We only trade where we see a significant benefit in terms of the likely extra returns less the associated costs. This can mean that in some months we do not make any changes, which can be very counter-intuitive.

 
Typically, we have changed between 30 and 50% of the portfolio’s holdings each year; with some of these changes resulting from changing an existing ETF from one provider to another with a newer, cheaper, more diversified alternative.

How do the USD $ and EUR € portfolios differ from the GBP £ portfolios?

The asset allocation of each portfolio will have a natural bias to the home currency and markets of the currency selected – i.e. the GBP £ portfolio with normally have a bias to GBP £ denominated markets e.g. UK equities and bonds. These will all be London Stock Exchange (LSE) listed ETFs.

 
The USD $ portfolio will normally have a bias to USD $ denominated markets e.g. US equities and bonds. These will all be NYSE (New York Stock Exchange) listed ETFs.

 
The EUR € portfolio will normally have a bias to € denominated markets e.g. European equities and bonds. These will all be ETFs listed on a European Stock Exchange.

Are there tax implications according to the currency of the portfolio I choose?

Yes. It is important to note that there may be tax differences for UK based investors from investing through either the USD $ or EUR € portfolios rather than the GBP £ portfolios since these will be buying US listed and European listed ETFs respectively, rather than UK listed ETFs. We will, wherever possible, select ETFs for the GBP £ portfolios that have ‘reporting status’ as these tend to be advantageous for many GBP taxpayers over those without ‘reporting status’.

How should I choose which portfolio?

SCM Direct does NOT give personal advice so we cannot tell you which portfolio to invest in. If you are unsure or nervous about investing directly, you should seek the advice of an independent financial adviser.

 
Our provision of model portfolios does not involve us considering the investment requirements of individual clients. We manage the model portfolios according to their stated objectives of the portfolio(s) and within the various parameters detailed within our Terms and Conditions. If you are unsure or nervous about investing directly, you should seek the advice of an independent
financial adviser.

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