Last week we spoke to the prominent Tunbridge Wells brokerage firms, AJ Bell and Jarvis Securities, who combined oversee the transaction of billions of pounds worth of equity trades each year. This week Market Watch follows the money to the fund management firm Wellian Investment Solutions, the middle men, who are tasked with ensuring that their clients get the best return possible on their capital during these turbulent times. We talk to director Richard Philbin…
The proper management of money is never more important than during periods of heightened market volatility.
With investors still hoping to eke out a yield, or defend their wealth while markets tumble, it is left to fund managers such as Wellian Investment Solutions to ensure they deliver.
Unlike brokers such as Jarvis Securities or AJ Bell, Wellian does not have direct contact with the original investor.
Instead it works on behalf of a financial advisor to offer a range of investment portfolios.
Each portfolio is then calibrated to suit the requirements and appetite of the advisor’s client, with a scale ranging from ‘conservative’ to ‘growth’ – with a corresponding amount of risk attributed to each one.
It also does not go on to directly invest the money into assets itself, but instead each portfolio option will comprise of a range of different funds carefully selected to best produce the result the portfolio was designed to deliver.
Director Richard Philbin explains: “If we take the example of delivering what we have labelled a ‘balanced’ portfolio, it is a bit like saying ‘if the answer is 7 what is the question?’
“By this we mean, we know where we want to be, but there are different ways of getting there.
“Say we believe the balanced portfolio should have high exposure to the UK market.
“There may be two different funds, created with a focus on the UK equities market, but one has shares in 15 FTSE 100 companies while another holds hundreds of little stakes in the small cap index.
“We have to decide which one will be best for delivering their objective, say a yield of four per cent, within the parameters of the portfolio.”
Each Wellian portfolio is then comprised of between 15 to 25 funds of various weight, meaning more money will be invested in some than others.
But each fund is selected to expose the portfolio holder to as a wide range of indexes, asset classes and geographies as possible, while avoiding duplication.
This diversity can help mitigate extreme risk.
What is equally important to Wellian is to ensure each portfolio on offer is not like any other they have.
Mr Philbin explained: “What we have to make sure of is portfolio one is different from portfolio two, which is different again from three. Otherwise we are not providing choice.”
It is a fluid process, with constant reviews and changes built up by a consensus of members of the investment team at Wellian, which have to be ready to react quickly to changes in global events.
This means that despite the need to keep each portfolio different, what can count as ‘balanced’ or ‘growth’ during the peak of a market cycle has to be able to change during a period of volatility.
“Our main competitor is the market and what is happening in the market,” said Mr Philbin.
“If we were a football team, no matter how good we were, if we played the same team each week, with the same tactics we would eventually lose.
“Therefore you need to increase your risks, or reduce your risks, and change the portfolios so that you can actually be prepared for what is going on. But still be mindful of keeping each portfolio different.
“For example, if we decided the world was going to hell in a hand cart, we could say the lowest risk portfolio is now 100 per cent cash.
“However, because the highest risk portfolio has to be different from those below, we would only be able to make it five per cent cash, for instance.
“Each portfolio has a natural ceiling and a natural floor on what can or cannot be done.”
And the current market climate has meant that recently Wellian have been moving their portfolios on to a more defensive setting, opting to increase exposure to more defensive assets at the expense of equities.
“We have had a fantastic run from the stock markets over the last six or seven years. We are
not saying there is a recession round the corner, but there is increased volatility.”
Although much of the causes of the current volatility are being attributed to China, Mr Philbin is very bullish about the country’s long term prospects.
He said: “In 20 years’ time China is going to be a global investing superpower. In the short term there is a lot of risk, but it is tomorrow’s story.
“My children are aged eight and ten, if I was putting money away for them not to touch until they retire it would be 100 per cent on China.
“The emerging markets of today are the mature markets of tomorrow.”
The other cause of the current market instability is oil, which Mr Philbin believes could do serious damage to the UK’s leading stock index.
Mr Philbin said: “There is an awful lot of uncertainty surrounding oil. Certain areas, such as India and Japan, which do not have much in the way of their own resources, will benefit hugely from cheap oil.
“But the implications for the UK are not so good because BP and Shell are two of the FTSE’s biggest companies.
“Their revenues are falling, but they make up around 14 per cent of the FTSE 100 combined. They have a big impact on the index and on dividend payouts.
“For example, a few years ago, BP and Shell were the only two companies to go down on the index one day, while the other 98 rose.
“But their joint weight still meant the index closed lower at the end of the day. This, among other things, is making the UK a high risk equity market.”
He also believes both companies will be under pressure to cut their dividends, which makes the UK a lot less attractive as a place to invest for yield.
The final cloud on the horizon for Mr Philbin is the possibility of a Brexit, which he described as an ‘unattractive’ prospect.
“I can see companies such as HSBC relocating. The financial services sector is likely to be impacted in a big way.
“I don’t think it will be an easy or painless divorce. Investment-wise we would have to get defensive, look more internationally, because the stance of Britain in the global economy will massively change.
“The volatility will massively increase. Markets are likely to take a five or ten per cent step backwards. There will be a lot of upset and a lot of pain for a lot of businesses, because stock markets and capital markets like certainty.”
But he is not sure it will come to pass.
“I don’t think Germany is prepared to let the UK leave. I think a number of our demands will be met, the renegotiation will be good.”