The objective of the game: To become the wealthiest player through buying, renting and selling assets whilst bankrupting all other players.
Whist the game, Monopoly, takes the objective to another level by suggesting that everyone else needs to go bankrupt in order for one to win, it is often the nature of the market to produce winners and losers. We also recognise that, although some similarities can be made between markets and the game of Monopoly, the market has many more variables and (depending on how you play) sometimes more serious consequences.
Each player will have a strategy, whether they are aware of it or not. There will be players who will buy at any given opportunity, players who will strategically target certain assets that they believe to be valuable and players who will do everything in their power to keep the cash that they have. The strategy one chooses will be greatly influenced by the level of risk one is willing to take and therefore the level of return one has the potential to produce. One can also have a mix of the strategies listed as each investor is unique in their wants, needs and confidence.
In this article, we refer to the strategy of Compass IFS and the investment process that applies when it comes to investing client money. We will use examples of investments held within some of the Compass portfolios and their strategic role. From the three broad investor types listed in the paragraph above, the Investment Team would identify as a player who strategically will target certain assets, within certain regions that we believe to be valuable whilst mitigating the risk of losing both capital and cash as much as possible.
The key to having confidence in one’s strategy is knowing the scope of your universe and navigation of the game. The Investment Team at Compass uses a variety of quantitative analytic measures in order to chart and support the qualitative analysis of the investment strategies of fund holdings. Each fund has a key role to play in any given portfolio which can be offensive goal strategies, defensive protection strategies and various other positions. We balance strategies according to the region and give each fund holding a job or purpose to ensure that the portfolios are given their best chance to outperform market competitors.
Knowing the role of holdings within a portfolio is crucial in identifying when an investment is “not doing its job” and therefore needs to be sold in place for a more effective strategy. We are consistently tweaking holdings; hence the fund switch letters that you will receive every so often. It should be noted that within our investment process we consistently monitor these holdings and if the fund in question has underperformed in comparison to its peers for a period of 6 months or more, this will prompt a full review of the fund. It should also be noted that performance, is not the sole justification for a fund being held in any of the Compass portfolios.
Understanding the role of a holding also gives an indication of how the fund should be performing at any given point in time. An example of this, which some of you in our lower and medium risk portfolios may be familiar with, is the Pyrford Global Total Return Fund. The role of this fund is to provide a steady, defensive strategy which aims to post a positive return each year. Although this may not sound like the most exciting player on the field; during this climate, where almost every market index has had a down period in the last 6 months, this fund has been one which has held up its defensive purpose. If you were to compare this fund to some of the riskier asset classes, you will notice that some equities have been down 50% or more across different sectors however the tortoise which is Pyrford Global Total Return has been the first quartile in the last 6 months and posted a positive gain of almost 3%.
An example of a fund which although has not damaged the Compass portfolios, but not performed as expected, is the Artemis US Extended Alpha Fund. This fund is a long, short fund which some of you may recognise from your most recent portfolio switch has been removed across all Compass portfolios. The role of this particular fund was to mitigate market volatility by using a long-short strategy which focuses on identifying and buying investments the fund managers expect to go up in value whilst shorting overvalued stocks or stocks expected to go down in an attempt to mitigate volatility. In the most recent market downturn, the fund strategy has performed more like a traditional equity strategy and therefore the decision was made that the fund did not fulfil its role as a defensive manager of volatility.
The roles of the various funds, of course, are redundant unless one understands the market climate. This is where we refer back to our Monopoly analogy and knowing your game. Our current market outlook is that during this time when growth stocks have been undergoing a cycle of re-rating valuations, there is a vast universe for wealth managers hunting in the right sectors for quality stocks. Although a more volatile environment, there are exciting opportunities to be had.
Continuing on the theme of Monopoly, we will lastly mention the role of the bank. In Monopoly- The Bank pays salaries, bonuses and dividends (such as passing go and receiving £200). In our next article we will expand on interest rates, inflation and the role of the dividend in a market climate where protection is key, however, there are still opportunities to be had.
We hope that the articles being distributed via the newsletters have been helpful.
If you have any questions in relation to the information provided or suggestions as to what you would like to hear more about, please do contact your adviser or any of the team at Compass.
Risk Warnings
INVESTMENTS ARE NOT GUARANTEED AND CAN GO UP OR DOWN. YOUR CAPITAL CAN REDUCE.
