We base our investment approach on the 10 Bourlet Consulting founding investment principles. Click on the titles to explore these principles further:
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
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.
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.
Our Investment Process
Experience tells us that the best way to achieve a great outcome for you is to follow the simple path outlined below, hover on the numbers to understand our process:
1 Review Investment Theory and Real Life Experience
There are plenty of organisations and individuals out there espousing their own particular brand of investment theory. Some are more sensible than others and some are just pure wild and wacky. We prefer to believe academic theory which is uninfluenced by financial self interest or bias.
From the research comes theory, which is all well and good but it needs to be put to the test. Stress testing the theory in the real world has enabled our views to coalesce since our origins and we have a sound evidence based approach to the investment of our clients’ funds.
2 Establish Core Investment Principles
From the investment theory and seeing it in practice comes our fundamental belief that markets work. We assess risk, determine asset allocations and rebalance our portfolios according to our own guidelines, critically, on a consistent basis.
3 Design Functionally Robust Portfolios
Assessing the universe of investment requires us to take a firm view on each of the market sectors which we can break initially into asset allocation. Within these allocations, detailed attention is paid to the geographic spread, size of stocks, liquidity and how they behave in various markets.
Understanding these behavioural characteristics and also how they interact is the key to ensuring that risk and reward are aligned
4 Implement Portfolios Effectively
In order to ensure that the investments perform as effectively as possible we ensure that the custody costs are kept as low as possible and that we use funds that participate in the markets selected without the costs associated with a high stock turnover.
5 Manage, Control & Review Process
The management of investment portfolios requires up to the minute technology and we ensure that our clients are provided with detailed information at the touch of a button.
Rebalancing the investments to reflect changing markets is an important part of what we do. We understand also that client views change and our systems allow us to reflect this with the minimum of fuss and cost.