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Investment Research  E-mail

Research is the key to our success. 

“Risk comes from not knowing what you are doing” – Warren Buffet 

By carefully analysising the markets, fund performances and economic factors, we are able to tailor specialist up to date portfolio to suit your requirements. We undertake to use investment planning using the theory first put forward by Professional Harry Markowitz.  This is a 50 year old theory which is becoming more important by the day. 

  • No Asset should be evaluated in isolation
 
  • Portfolio Risk is less than weighted average of individual risks
 
  • Risk falls as assets diversify
 
  • Portfolio selection = maximising returns and minimising risk
 All investment decisions involve a trade off between risk and reward.  Normally the greater the risk and investment you are prepared to accept, the greater should be the expected reward. There are a number of risks which effect investments, and the following are some of the risks that we feel are important for you to understand. Market Risk

 

This risk rises from the possibility that whole markets may fall which if extended is known as a bare market. The most effective solution to minimise this particular risk is Diversification across a variety of different asset classes. Credit Risk

 

Most investments involve some type of credit risk.  This is most significant in the Bond markets where there is a possibility that the issuer will default on the interest payments.  High quality Bonds such as those issued by companies with strong financial positions tend however to pose less credit risk than those issued by weaker companies. Inflation Risk

 

The uncertainty of what your money will be able to purchase in the future is inflation risk.  It is especially important for investors to rely on their savings and investment to provide them with an income. Interest Rate Risk

 

Movements in interest rates can have a devastating effect on investments, especially Bonds and of course Stock Markets. In general terms the longer a Bond’s Maturity, the greater the sensitivity to change in interest rates. Currency Risk

 

Currency markets can be extremely volatile with large movements possible within a relatively short period of time.  This can have a very significant impact on the value of overseas investments for investors. Legislative Risk

 

The Government of course have the power to create and change existing tax which may affect investments.  For example changes in Capital Gains Tax Legislation could affect payment strategies concerning planned liquidations of investments, such as for Retirement or School Fees. Liquidity Risk

 

Certain investments do not vend themselves readily to be disposed of which may be particularly important for certain types of investors.  For example, Commercial Property Funds which under certain circumstances may remain liquid for up to six months.  Portfolio Construction

 

To minimise investment risk, aiming to provide maximum returns, diversification is an important component to consider. Diversification means spreading your investments across a variety of asset classes such as equities, bonds, property and cash. By diversifying an investment portfolio across various asset classes, the risk can be significantly reduced.  Investments where the prices are negatively correlated will see their individual prices move in opposite directions.  Therefore by blending assets that have historically low or negative Correlation with each other it is possible to reduce fluctuations in portfolio values, often known as Volatility. It is even possible to achieve investment diversification within one single Asset Class. For example buying shares in a company which makes umbrellas, at the same time as buying shares in a company which makes sun cream.  This is known as systematic and Unsystematic risk management.  Systematic risk is something that affects the market as a whole, where as unsystematic risk is specific to one sector of an asset class or company. Asset Allocation

 

Asset Allocation is the process of dividing an investment amongst the various type of asset classes that are appropriate for possible inclusion into a portfolio.  Much research has taken place to suggest that Asset Allocation is one of the most important factors to determine volatility and ultimate rewards, however a more recent survey suggests that timing may be even more important. When selecting the right asset class and the appropriate proportion, we use sophisticated stochastic modelling.  As some Asset Classes do well at certain times, whilst other do well under different conditions, timing is essential, this is often referred to as investment cycles. 
 Asset Class   What Happened
Shares UK shares outperformed the other asset classes over the 10 year period shown, but the first three years of this decade have been particularly difficult.
Property Property has narrowly beaten all the other asset classes over 10 years, after trailing behind since the early 1990s.
Fixed Interest Fixed interest investments have also experienced volatile conditions, but not to the same degree as the rollercoaster ride endured by UK shares.
Cash Cash has outpaced inflation over the long haul, but has had a hard time doing so.
 The stochastic investment model we use was developed by Tilling Hast Towers Perrin who are a respected international actuarial consultancy.  These stochastic model forecast how different investment strategies react during economic cycles.  The system uses the Monte Carlo Method of stochastic modelling, which allows for variable investment returns over investment periods as it is widely accepted that fixed return assumptions used by traditional methods is never the case in practice.  The model therefore forecasts investment returns on different asset classes, such as equities, bonds, which may vary over the time.  This may then be used to work out how investing in different assets could affect an investment over time.  This concept can therefore be described as Forecast Based Advice incorporating correlation to diversify investments utilising risk and return efficient frontiers.  In English this means that it is not worth placing an investment in the higher risk arena if the returns are not sufficiently high.  In fact, if we calculate that all the different investments within a portfolio or fund gave us the same amount of risk, some investments would give a better return than others and one would be the highest.  The portfolio given the highest returns for a particular level of risk is the most efficient.  We therefore conduct an analysis of the efficiency of our recommended portfolio and by maintaining the portfolio in line with the target asset allocation, we can keep an efficient mix of risk and return. The final stage to incorporate the use of Financial Express to track the past performance of the recommended portfolio using hindsight technology. Monitoring

 

Once your portfolio has been agreed and constructed, it is equally as important that it is frequently monitored therefore ensuring that your risk tolerance and investment objectives are maintained.  We therefore often rebalance portfolios to ensure that the efficient frontier payable is closely adhered to. Collective Investments

 

The primary Asset Classes such as equities, bonds, property and cash together with other asset classes such as commodities and private equity may be combined in what is known as Collective Investment schemes.  The collective investment is a fund that allows investors to pool their money together.  This ultimately means that your investment is spread across a wide range of different investments.  Wrapper products may also be used such as ISAs, Unit Trusts, Insurance Bonds and OEIC. Although there are no guarantees, the good thing about collective investments can be summarised as; 
  • You can pool your money with others to help spread the risk
  • You have access to investment markets
  • You have professional investment experts working on your behalf.

 For more invesment news please click on the link below.

http://www.prospectwealth.co.uk/files/Investment%20Prospects%20-%200711.pdf 
 
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