At FPWM we prioritise the management of investment risk. It is vitally important that your portfolio fits your risk profile and behaves in a way that means you are comfortable to remain invested for the long term.

To ensure that your portfolio is a good fit, we need to really understand how you would react to ups and downs in the value of your portfolio.  These ups and downs are part of the investment journey, but equally that journey should be as comfortable and appropriate as possible for each individual investor. Let’s face it, some of us are better travellers than others.

Psychometric Risk Profiling 

We use a psychometric investment risk questionnaire as a starting point for our discussions with clients about their personal circumstances, financial goals and views about investment risk. The resulting risk profile provides the basis for an informed discussion about the nature of risk and the investment return which might be achieved by taking the amount of risk which that individual will be comfortable with over the length of their investment journey

This provides a defined pathway to an appropriate asset allocation framework in line with the client’s agreed attitude to risk. We categorise Risk Profiles on a scale of 1-5; Risk Profile 1 being for the Cautious investor and 5 for the Adventurous investor.

Once we have agreed an investment risk profile we build an individual portfolio around the framework provided by whichever of our 5 risk profiled asset allocation benchmarks is appropriate for that particular client.

Asset Allocation is the structured process of dividing an investment portfolio into a number of different asset baskets and deciding how much should be placed in each of those baskets to achieve an optimal investment return over the long term.

To create this framework we rigorously tested all of the experience based knowledge that we had acquired over our many years as investors and every investment thesis that underpinned how we managed our clients’ money.  In essence, we doubted everything and let the analysis drive our investment process.

We identified 11 different asset baskets that we considered central to a modern and diversified portfolio.  We then rigorously analysed and modelled their performance and characteristics over numerous periods and different parts of the economic cycle, both individually and also as part of a diversified investment portfolio.

We modelled returns of all of these different options and time periods and arrived at our Strategic Asset Allocation framework – this represents the fruits of our labours and what our analysis shows is the best way to invest money for our clients over the long term.

To allow for each individual’s different views on risk, we have created 5 different Risk Profiled Strategic Asset Allocation benchmarks.  These are measured on a scale of 1-5; Risk Profile 1 being for the Cautious investor all the way up to Risk Profile 5 for the Adventurous investor.

Each person has a limit to the amount of risk they are prepared to take with their investments, which we like to call their “risk budget”. Our job when constructing their portfolio is to spend that risk budget wisely and our asset allocation framework helps us to do this in a structured and robust way.

Tactical Asset Allocation

The only constant thing in life is change.  This is also true in the world of investments and as a result, we employ a Tactical Asset Allocation process as an overlay to our Strategic approach.  This comes out of our quarterly Investment Strategy Committee meetings where we debate how politics, economics and other factors might affect our clients’ portfolios.  Where appropriate we apply these views to our clients’ asset allocations to control risk or seek greater opportunity where appropriate.

Once we have decided upon the appropriate asset allocation for your portfolio, we then need to pick the “best of breed” investment managers who we trust to provide the returns for each asset basket.

Our fund selection process can be divided into two different types of analysis: Quantitative and Qualitative.

Quantitative Analysis

Quantitative analysis focuses on the mathematical and statistical elements of fund returns and is performed by our institutional class proprietary algorithm – .  FundSight®.

We made the decision to create FundSight®. because we needed a robust and repeatable process that helped us to select funds which closely reflected our investment philosophy and the needs and desires of our clients. In other words, we look for managers that maximise the return gained for each unit of risk that they use from your risk budget – providing superior risk adjusted returns.

We believe that truly talented managers are able to consistently outperform sector peers and their benchmark and that this provides a greater potential return for investors than investing in passive index trackers or ETFs.  Also, we know that our clients value the characteristics of investment returns as well as the absolute level of those returns. As with any journey, it is not just about getting somewhere, it is also about getting to where you need to be in the manner that you want to travel.

We use FundSight® to analyse each of the IMA fund sectors placing great value on consistency of performance.  To do this we put greater emphasis on discrete returns (examining returns over a vast number of different time periods) than cumulative returns that just show where a fund ends up and not how it got there.

An important differentiator of FundSight® is a positive bias towards shorter term performance. Although we appreciate and understand the value of experience, we are also wary of placing too much faith in past performance of managers that may not be relevant to current market conditions, or with those whose best days may be behind them.

We strive to identify talented managers and FundSight®.  has highlighted a number of star funds before they were known to the wider adviser market; creating additional portfolio Alpha.

In addition to the discrete and cumulative performance, we also analyse the return characteristics of funds using a number of investment ratios, including:

• Beta
• Sharpe Ratio
• Alpha
• Information Ratio
• Sortino Ratio

FundSight®.  creates a score for each fund for which we have data and the results identify suitable funds to which we apply our final Qualitative Analysis screen – applying the human touch.

Qualitative Analysis

When a fund has been highlighted by FundSight®. as having the superior risk adjusted return characteristics that we seek, we undertake a due diligence process to understand the finer details of how the fund is run and administered. Here we use our experience and knowledge to gain in-depth insight into the managers, their investment processes, their management style, their team and also the company’s financial and administrative structure.

We need to have comfort that the manager has a structured, repeatable and demonstrable process and that they will take care of our client’s assets as they would their own.

If the fund passes this final element of our process, then it can go onto our approved list of more than 80 funds and be selected to feature in client portfolios.

We run FundSight® on a quarterly basis to ensure that the funds on our buy list remain appropriate and maintain the characteristics that we seek. We use our Traffic Light system to identify whether we should buy, hold or sell each particular fund on the list.  This keeps the list relevant and maintains the quality and “best of breed” approach.