We base our investment approach on the 10 Bourlet Consulting founding investment principles. Click on the titles to explore these principles further:

Markets work

Rather than trying to outguess the market, let it work for you. When the investor rejects speculation, investing becomes a matter of separating risks. Those that investors are compensated for (market risk) from those where they receive no compensation (individual company risk, industry risk, single country risk and so on). It’s then a question of determining how much of these risks to undertake.

Financial science identifies the sources of investment returns and we provide the tools and experience to achieve them.

Risk & return are related

Evidence from investors and academics alike points to an undeniable conclusion: Returns come from risk. Gains in the marketplace are rarely accomplished without risks with the caveat that not all risks carry a reliable reward.

However, thanks to academics, over the last fifty years financial science has brought us to a powerful understanding of both the risks worth taking, and those that are not. Focusing on what we know, rather than the speculation coming from The City, Bourlet stays true to the principles that really matter in developing a responsible, successful investment strategy.

Portfolio structure explains performance

For years financial analysts have sought to answer one question above all others;  What in the investment management decision-making process can most enhance portfolio performance?

Most believe the answer was found in a ground-breaking piece of research titled “Determination of Portfolio Performance”*. Its somewhat surprising conclusion was that asset allocation accounted for over 90% of the variation of returns, with the remainder decided by market timing and stock selection. More recent studies may disagree with the proportions but, like us, they appreciate the significance of carefully allocated assets.

*Gary Brinson of Brinson, Hood and Beebower, 1986

Diversify

When it comes to risk and return, research shows that investor portfolios are best served by being diversified across all asset classes, as well as within all asset classes. That’s because each plays a different role in the portfolio, and the sum is often greater than the parts. Indeed it’s our experience that, with sound diversification, investors can achieve greater expected returns over time and experience lower volatility than they would in a less comprehensive portfolio.

Fund manager skill is hard to identify in advance

Many factors influence the performance of funds – a major one being expenses (see principle no. 8). However, the factor that usually receives most attention is the alleged ‘skill’ of the fund manager based on his or her superior market knowledge. In fact the overwhelming majority of research indicates that there is no way to identify superior performers in advance – and all will have their ups and downs.

Therefore, we eliminate the risk of choosing the wrong manager by following a broadly diversified approach that does not rely on stock picking or market timing.

Invest only in assets that have an expected return

This may seem an obvious statement but one should always distinguish between assets that generate a return, versus those held in the hope that their capital value will increase. For example, bonds, shares or property provide one with a return by way of interest, corporate earnings or rent. Contrast this to owning a commodity, such as gold, where the return is based solely on being able to sell your investment for a higher price than you paid.

Invest for total return

Investments generate return from income (interest and dividends) and capital growth. The total return from a portfolio is the sum of these two parts. When selecting potential investments for a portfolio, we decide based on the potential total return relative to risk – not how that return is made up in terms of income and capital growth. This is the only academically sensible way to build an investment portfolio.

Minimise costs and taxes

If speculation is futile and trying to choose winners is often a gamble, what can the investor control? The answer is minimising the costs of investing and reducing the impact of taxes. Minimising cost is critical to achieving long-term investment success because, unlike future performance, costs are both predictable and controllable. Furthermore, contrary to the typical economic relationship between price and value, we believe higher costs do not tend to lead to higher long-term returns.

Understand what you’re investing in

The recent financial crisis illustrates how even financially ‘sophisticated’ professionals didn’t understand the risk they and their companies were taking by investing in complex financial products. We believe it’s important for the investor to ask questions and fully grasp what they are investing in.

Rebalance

Once a portfolio is formed from various asset classes, security prices will fluctuate and asset proportions will diverge from the target proportions. Left to drift, a portfolio can evolve into an asset mix with decidedly different risk and return characteristics from the initial target. Therefore, rebalancing entails the adjustment of a portfolio’s asset proportions. We will do so by selling over-priced ‘hot’ sectors and move into low-priced ‘out-of-favour’ sectors – often precisely the opposite to what most investors are doing.