Stephen Thaxter – Senior Partner and Principal Adviser
Sovereign Wealth Partners
This is the fifth article in a series designed to help you get the very best out of your financial adviser. If you’re already a client of Sovereign Wealth Partners, hopefully you’ll recognise the process and feel empowered to revisit these conversations with us at any time. Your aim is to be confident that you can live an extraordinary life backed by wealth that’s beautifully aligned with everything that’s important to you.
Remember though, extraordinary advice partnerships are elusive. So the conversations are probably not what you’d think.
This is such a great question to put to your adviser. If the answer is “Actually I do my own research and I’ve got my own process”, that’s a red flag. An adviser’s first job is to think about their clients. Helping them lead confident lives backed by great wealth management decisions. If that’s not enough they also need to run a small business, manage the regulatory red tape and market themselves. Nor must there be any conflict between putting clients’ interests first and flogging something they’ve got a vested interest in.
It won’t surprise you that financial advisers will have a healthy regard for their own financial prowess. Fair enough, but they’re not investment gurus. Their skill set is not to beat the market or compete with professional fund managers. So the answer you’re looking for is something like “glad you asked… XYZ* is my investment guru”. That gives you something to go on and see the list below for some of the most famous. Here are the follow-up questions. What is this guru’s process, what are the results and over what time period? And by the way, the time period has to be really long to have any credibility. Five years is starting to get there, preferably longer and definitely through a boom and a bust. And how much of my portfolio will this particular investment guru be running? How painful was their worst losing streak? How many different investment gurus should be sitting behind my portfolio? Are they worth the expense? The conversation eventually turns to a set of beliefs about investment. These beliefs are popularly known as “investment philosophy” and Sovereign’s investment philosophy is set out here.
Just like horses for courses, there are many different first class investment philosophies. The most useful can be turned into a practical process that make good money over multiple market cycles. But no matter how smart your guru is, their process won’t work all the time. There will be periods when it looks plain stupid. That’s when the adviser has to step up and earn their keep. Why is the guru out of sync with the market? Is the process broken or will it come roaring back when the investment markets move on from their latest obsession? Getting this right is so hard. It’s human nature to be attracted by an investment when it’s on top of the world. And when an investment guru is in perfect sync with the market, it all makes perfect sense, so we clamber on board. Trouble is, by the time the average investor gets in, we’ve usually already hit the top of that particular cycle. And when things aren’t going well, we bail out. With hindsight, that’s often at the bottom of the cycle. Rinse and repeat, this destructive cycle destroys capital and the adviser needs to break it.
Ideally, the adviser needs to have some understanding of the gurus and processes that work best in different market conditions. Easy in hindsight but looking forward it’s really hard. But more importantly, the adviser needs to impart the understanding and confidence to stay with tried and tested processes. The benefits come from the discipline being applied consistently. Carefully blending processes and gurus together can take some of the risk out. Even if, by definition, the result is a multi-speed portfolio. In fact its often said that a portfolio is not truly diversified if everything is going up.
For our part at Sovereign Wealth, we believe that certain managers, strategies and styles will out-perform the broad market and the average investor over the long term. We seek to find the best of the best, blend them together and stay with them, leaning towards those that are more likely to make decent money in the future rather than the best performers of the moment.
* Some investment gurus worth name dropping
Benjamin Graham – the father of value investing.
His focus was fundamental value: go easy on the leverage, consider the share price to earnings ratio, cashflow and sales growth. Invest with a “margin of safety”, that is only buy a stock when the value of what you’re buying far exceeds the price paid. Avoid fads and untested business models.
Produced average returns of 20% between 1936 and 1956 when the US share market did 12%.
Warren Buffett – the patient investor
A Benjamin Graham disciple with embellishments – “Wonderful companies at a fair prices” over “wonderfully priced fair companies”. Management integrity above all else, a preference to own the company outright, understand the business completely and hold it forever.
Average returns of 20% from 1965 to 2012 when the US share market did 9%. Matched the US share market from 2012 to 2019, underperformed a lot during the recent boom in technology stocks but has outperformed since COVID vaccinations were announced.
John “Jack” Bogle – the father of index funds
The creator of the first index fund and founder of the low cost indexing specialist Vanguard Group. An index fund is designed to return the performance of a sharemarket index after running costs. Bogle preached investment over speculation, long-term patience over short-term action, and relentless reduction in running costs. “Owning the stock market over the long term is a winner’s game, but attempting to beat the market is a loser’s game.” For the average investor, this appears to be true – as at the end of 2020, SPIVA reported that over the previous 5 years 82% of actively managed share funds in Australia had underperformed their index benchmark after running costs. The ideal investment vehicle for Bogle was a low-cost index fund purchased with dollar cost averaging, held over a lifetime with dividends reinvested. Combined 60/40 with a bond index fund, the result is the core of the famous “balanced” fund strategy that’s enormously popular today.
Thomas Rowe Price – the father of growth investing
Founder of T Rowe Price, offering one of the first growth focused mutual funds. Averaged 15% over 22 years from 1950, versus 12% from the index.
Growth investors seek outsized returns from high growth potential businesses, with less reliance on current fundamental value criteria. Other than increasing earnings per share, there is no absolute formula (indeed in today’s world the company may be making huge losses) but it’s about successfully executing growth in sales, markets, market share, competitive advantage and technology into cashflow and profits.
David Swensen – Yale endowment fund manager (passed away May 2021)
Seek multiple sources of return to reduce downside risk whilst compounding capital. Favoured global and emerging market stocks, real estate, natural resources (forestry, farming etc) , bonds, hedge funds, private equity and start-up capital. Averaged 11% return over the 10 years to 31 December 2020. This is less than the 13% from US shares over the same period, but with a much smoother ride.
And what about modern day investment gurus? Speak to your Sovereign adviser for our view.