the impact of individual ‘shocks’ on our portfolios
More and more people are turning away from traditional high cost investments, and looking for a trusted, fair fee, transparent professional third party, such as SCM Direct to look after their and their family’s money.
At SCM Direct we offer a smart, common-sense, modern way of investing in segregated accounts. This avoids layers of intermediaries and fees, conflicts of interest and with the added security of investments held in clients’ names via discretionary portfolios, so no money comes to us at SCM Direct.
Clients simply give us permission/discretion to look after their investments, allowing people the peace of mind of knowing our team of professionals are doing all the research, due diligence and asset allocations changes required to ensure they can achieve their investment goals.
Of course, this all means you have to put your faith in us to make the investment decisions that we believe will enhance your returns. To reassure clients of our proof of promise, the Founders invest significant sums of their own money, across all portfolios, on exactly the same fees, terms and conditions as clients.
At SCM Direct we offer a simple, understandable, fair fee way of investing money
Most investors invest via mutual funds which are professionally managed collective investment schemes that pool money from many investors to purchase whatever the fund is investing in. The first mutual funds were established in Europe around 1774 but little has changed since then.
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.
Discretionary portfolios have in the past been the preserve of wealthy individuals and large institutional investors but today’s modern technology allows SCM Direct to offer portfolios to investors with much smaller amounts to invest.
According to the Oxford English dictionary, a contrarian is a person who opposes or rejects popular opinion. We would add to this, someone that is also principled.
A Contrarian is willing to be different and doesn’t worry even when they are the only person thinking their way. As contrarians, we are willing to go against the herd, buying out-of-favour investments, often cheaply, then selling them at higher prices when they become fashionable.
“be fearful when others are greedy and greedy when others are fearful”
Alan Miller is our Captain Contrarian and uses his knowledge and insight gained over 28 years. In addition he adheres to the advice of two investment superheroes, Warren Buffet and Donald Rumsfeld.
Mr Buffet advises investors “to be fearful when others are greedy and greedy when others are fearful”, i.e. buy when everyone else is desperate to sell, and don’t fall for the hype of the herd.
Mr Rumsfeld said that “There are known unknowns… But there are also unknown unknowns. There are things we don’t know we don’t know”, i.e. buy the things you can interrogate, know and understand rather than speculate on the things you don’t know and can’t predict.
To make the most of the investment opportunities we believe still exist, we invest in a disciplined, diversified and cost-efficient manner, concentrating on fundamental value so our clients actually benefit from the “fearful”.
The old fashioned fundamentals we use to evaluate an investment opportunity and see how it measures up before deciding to invest include price/earnings ratio, price/book value ratio, price/cash flow ratio, dividend yield, price/earnings growth, earnings growth.
invest in different assets that respond differently to the same market forces
Many researchers have found that asset allocation has a significant impact on overall portfolio returns.
Asset allocation is an investment technique used to spread investment pots across asset categories. Equities, bonds, commodities and cash are the most common component, however there are others e.g. private equity and property.
By using asset allocation to invest in different assets that respond differently to the same market forces, this helps to smooth investment returns as some assets will be performing well when others perform badly, and vice versa. But it is important to remember that all investing involves risk and that there can be no guarantees.
Academic researchers Ibbotson and Kaplan found ‘the average of all investors is the market itself, with good managers and bad ones cancelling each other out, so that asset allocation ultimately accounts for 100% of the absolute level of returns
Tactical asset allocation is when an investor believes that they can get better risk-adjusted returns by dynamically changing asset allocations rather than following a rigid, fixed ‘buying, holding and hoping’ method of asset allocation.
At SCM Direct we describe ourselves as actively passive as we undertake both tactical and strategic asset allocation i.e. we believe in being active in our asset allocation, but use passive index funds called Exchange Traded Funds (ETFs) to fulfil our asset allocation decisions; offering clients the best of both worlds. By only investing in ETFs which are modern, low cost, and highly diversified, we are able to be extremely nimble and efficiently implement our tactical asset allocation decisions.
An empirical study by Ibbotson Associates et al in 2000 showed that 91% of the variance in investment returns was derived from asset allocation, 5% from stock selection, 2% from market timing and other factors 2%.
the impact of individual ‘shocks’ on our portfolios
more logical and less emotional investment decisions in order to achieve our goal of long term consistent performance based on fundamentals rather than fashions
asset allocation changes to portfolios opportunistically rather than via a rigid, fixed approach that may work in some market conditions but not in others
changes to portfolios just for changes sake or to earn higher fees. This can result in over-trading, carrying large extra hidden costs at the clients expense
from experience and never be afraid to admit when we have got it wrong
Diversification goes hand in glove with asset allocation. It means spreading your investment pot around different investments to reduce risk. When buying a house the experts advise you to think location, location, location; in investments it’s diversification, diversification, diversification.
Diversification serves as a safety net but cannot guarantee to reduce risk completely. It’s a fundamental tool which helps us address our clients concerns around risk.
Using Exchange Traded Funds (ETFs) To Enhance Diversification
A well-diversified portfolio should be diversified at two levels: between asset categories and within asset categories. Therefore in addition to investing the portfolios amongst equities, bonds, cash, and possibly other asset categories, we also spread our investments within each asset category by investing through well-diversified index funds, ETFs. We believe ETFs are ideal, as they are highly diversified index products that fulfil sophisticated investment strategies in an efficient, fully transparent and low-cost manner.
All the portfolios hold a wide variety of ETFs, investing in a diversified basket of large and liquid indices across different asset classes to protect against the risk of loss from failing companies. This is called diversification, although we typically hold between 10-20 ETFs in each portfolio, the underlying holdings, which are held within these ETFs, place the SCM portfolios amongst the most diversified in the UK.