How direct investment has helped us deliver strong returns
One of the key features of the Waverton Managed Portfolio Service (MPS) is the use of direct investments. Over the last ten years the four core MPS mandates have been ranked in the top quartile over each time period[1], and our direct investment style have been a major factor in this success. In response to adviser demand, we have recently launched a new Equity mandate within the MPS range.
With the exception of this Equity mandate, the portfolios are comprised of four Waverton ‘building block' funds; a bond fund, an equity fund and two funds of alternative assets. These funds are managed in-house, specifically for the MPS and this structure allows for greater transparency, consistency and agility. The weights attributed to each of these funds is commensurate with the risk profile of its mandate and is adjusted tactically by an asset allocation committee. These funds predominantly hold direct investments but have the flexibility to invest in other funds if appropriate.
Direct equity investment refers to buying shares in a company, rather than a position via a fund. It can also refer to buying a bond outright, rather than a fixed income fund - direct purchases of bonds is also present in the MPS. Direct fixed income investments allow the fund managers to be nimble and try to adjust to any headwinds that they foresee. This fixed income exposure can provide a source of diversification in portfolios
There are many benefits to this style of investment, and our in-house research team are excellent at searching out best-in-class companies that fulfil our security selection criteria. This style of investment allows us to judge each company on its own merits, rather than its importance in any index, as would be the case with a tracker fund. Some indexes have large weighting to companies that have seen strong recent performance, but these may be vulnerable to the downside if these components fall sharply. Stock picking can create the opportunity to carefully navigate market conditions, allowing us to be less exposed to wider market sentiment.
Buying shares directly means that, over time, our investment team can develop strong, constructive relationships with company management teams. We can offer advice and are kept informed of developments in their businesses, allowing us to get under the bonnet of companies and look beyond the headlines. Direct investment also means that we are at the front of the queue should one of our holdings undertake a capital raise, or similar corporate action. These can be a valuable source of returns.
Consideration of Environmental, Social and Governance (ESG) factors forms an integral part of our fundamental research, and this process is more efficient via direct investment. We strongly believe that these factors have a significant bearing on the long-term returns of an asset. We can be more in tune with the ESG realities of our investments, as opposed to being more heavily reliant on comparatively subjective ESG ratings.
Having a direct relationship with the companies that we invest in also allows a greater degree of risk management. We can be more aware of the factors that affect our investments, and more alert to any vulnerabilities. All our MPS mandates seek to operate within volatility parameters, and this is made simpler thanks to the transparency afforded by direct investment.
There are occasions where we feel that funds can be a useful supplement to our direct investments - they can provide diversification and specialist expertise in certain areas - but, by and large, we feel we can serve our clients best with direct investments. By avoiding investing in funds where possible we remove a level of fees, passing these savings on to the investor as improved returns. Investing in an MPS which uses direct investment - such as the Waverton offering - avoids outsourcing to a firm that, themselves, outsource responsibility.
Over the last ten years of the MPS there has been a noticeable evolution, but the key messages of generating real returns for our clients via direct, active, multi-asset investment remains the same, as have the consistency of returns.
[1] Asset Risk Consultants
