How Capital designs your investment portfolio to achieve optimal returns


How Capital designs your investment portfolio to achieve optimal returns

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4 minute read

Investment portfolio performance is a direct result of the investment portfolio structure. Stronger designs lead to better outcomes.

Crafting, designing and building a great investment portfolio takes skill. It’s like baking a cake: having the right ingredients is a good start, but knowing what to do with them makes all the difference. Eric Morecambe put it best in the Morecambe and Wise Christmas Show in 1971, when he told Andre Previn:

I’m playing all the right notes; but not necessarily in the right order.”

There isn't a retail shop selling Capital portfolios. Each one is hand-crafted by the investment committee.

Getting the design wrong isn't an option. Poor returns on investment damage client relationships and lead them to feel that they have misplaced their trust.

The approach to investment management

Intelligent Investing™ launched in February 2011 with the aim of delivering outstanding results for our clients. It all began with evidence and academic investment research.

Our approach is designed to be different and involves guiding principles that have stood the test of time. Building and maintaining a strong structure for each portfolio is crucial to long-term success. So is managing costs: there is a wealth of evidence showing how much cost matters. These are key focuses for us.

A final stage was designing a robust risk management process which struck the right balance between harnessing ‘good’ risk and mitigating ‘bad’ risk in the portfolios. This includes rebalancing portfolios, ongoing due diligence and regular governance.

The guiding principles of an investment portfolio

When creating our Intelligent Investing range, we agreed on eight guiding principles.

  1. Let the global economy (the market) do all the heavy lifting for you. The market processes information relentlessly in micro-seconds. With millions of buyers every day, all day, the real-time information sets the pricing.
  2. Investing isn’t gambling or speculation. Some fund managers claim to outperform the market. They can only do this by taking unusual positions. Some may win over the short term, but almost all lose in the long term.
  3. Investing aims for returns in the long term. People tend to invest for the 30 years leading up to retirement, and then for another 30 years while in retirement. Investment returns need to be positive and above inflation.
  4. Avoid too many eggs in too few baskets. A globally diversified portfolio will help to reduce risk.
  5. Don’t attempt to time the market. There are over 7.5 billion people on earth. A significant number of adults invest across the globe. Trying to outsmart them is a loser’s game.
  6. Be aware of your emotions and manage them. Money makes people emotional, whether making money or losing it. Markets can rise and fall sharply and unexpectedly. Poorly structured investment portfolios can encourage reckless or overcautious behaviour.
  7. Keep costs low. The cost of investing is rarely immaterial. High costs act as a dragging anchor on long term performance, all other factors being equal.
  8. Focus on what you can control. You can’t control the Fed or the Bundesbank, let alone the economy of China. You can control how much you spend and invest. With careful attention to detail, you can also control costs.

The wide range of investment choices

The range of investment options available in the modern world is enormous: from treasury bonds, corporate bonds, and commercial property funds to REITS, gilts and fixed interest; from company shares both UK and international to smaller companies such as blue-chip, value and growth companies.

The filter

Filtering is essential to reduce this sprawling landscape to something manageable. This is how it is done at Capital.

  1. The starting point is over 600,000 available investments to select from.
  2. A screening process narrows this down to a chosen 10,000.
  3. The investment committee applies another in-house filter which reduces the range to a still long, but more manageable list of 100.
  4. Further screens and filters are applied to better identify the top-ranking funds. This is based on algorithms, share classes, cost, and other factors. Capital then carries out extensive research and analysis on the top 10 funds in each asset class.
  5. Every 90 days, the investment committee meets to review portfolios, performance, and behaviours.

The asset mixes of your investment portfolio

Getting the right blend of ingredients is key; a heavy hand will lead to poor or unexpected outcomes. It’s important to know what to include and what to exclude. The aim is the ideal mix.

Investment options merge into groupings of similar types, called asset classes: cash, bonds, property and shares. Over the long term, asset classes tend to follow a natural order, but this can and does fluctuate over time. For example, there have been periods when bonds have outperformed company shares.

Economics tells us that investors are rewarded for risking their money. A company share should be higher risk than a UK treasury stock, and offer a higher return in exchange.

Each investment portfolio is assessed against six functions.

  1. The percentage of growth assets and defensive assets.
  2. Their long-term annualised return.
  3. Their future return gap over and above inflation (CPI).
  4. How diversified the fund is (on average, 8,000 holdings).
  5. 90-day monitoring and measurement.
  6. How low-cost each portfolio is.

Defence and growth

Your investment portfolio will consist of two key elements. Defensive assets will be maintained to protect your capital, while growth assets will take greater risks to earn you greater rewards.

It's like a car: the growth asset is the power and speed, and the defensive assets are the ABS braking, airbags and seat belt.

To match each client’s individual expectations, we has designed five investment portfolios ranging from more defensive to more growth-oriented approaches. Selecting the right portfolio will lead to peace of mind; it should mean that your goals and desires are consistently met, in full and on time.

Each portfolio is monitored to ensure that it performs as expected when markets rise or fall in value.

Why you should invest

The key reason why investing is different to High Street saving is inflation.

Consider the cost of two pints of milk in 1917. By 1967, that same amount of money would only have bought enough milk for a glass; in 2017, it would buy no more than two teaspoons. In other words, the rising cost of living means that your money will buy less tomorrow. Investing aims to keep up with or exceed inflation, maintaining your purchasing power.

Regular servicing and maintenance

To continue with the theme, investment portfolios need regular maintenance. Each quarter, the Capital investment committee meets to ensure this happens. The team analyse, measure, test, and probe. Are the investment portfolios fit for purpose? Are they performing to expectations? Is there new academic evidence which needs to be considered?

investment portfolio graph


Charges act as a drag on performance. At Capital, shortlisted fund managers must offer an excellent service at an economic and commercially competitive cost. If we can source an improved service at better terms for our clients, all else being equal, we will.

Shooting stars

There is overwhelming evidence that the investment returns produced by ‘star’ fund managers like Neil Woodford are based more on luck than judgement. What starts as investing often turns into speculation and gambling—with other people’s money. These actions tend to increase costs as well as risk. Our approach removes human bias from the process and invests on academic and evidence-based principles.

If you would like to know more about investing with Capital, get in touch today.

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