2014 Investment Review
Another mixed year for the global economy as countries with (varying degrees of success) continue to try to navigate their way out of one of the deepest recessions in history.
The UK economy performed well despite the uncertainty caused by the Scottish referendum and concerns about low inflation. The US economy also continued to strengthen, posting strong data on manufacturing and employment as they continued to wind down their stimulus programme.
The Eurozone continued to struggle in 2014 despite positive news from Spain, Portugal and Ireland. Of most concern was weak activity in France and Germany raising the prospects of the ECB launching its own quantitative easing programme in 2015.
Japan entered recession after a strong start to the year and Emerging Markets continued to show signs of weakening with geopolitical unrest in the Middle East and Ukraine and weakening economic conditions in China.
So what does all this mean for me?
Comparing historical returns with economic performance shows us that there is often very little link between the two despite what the media may have us all believe. For example US growth in Q1 was revised downwards but stock markets rallied.
Many investors are tempted to change their portfolios depending upon the latest news or predictions in a bid to improve their return. The evidence tells us that markets react almost instantly to new announcements and any advantage evaporates just as quickly. Investors who constantly adjust their portfolios achieve little more than increasing their costs and damaging their returns. Fewer active fund managers outperformed the market in 2014 than at any time in over a decade (fewer than one in five).
Our continued and firmly held belief is that staying disciplined and remaining invested in the right portfolio will see you through short term developments and is much more likely to reward you with a better long term return.
2014 market returns clearly show the benefits of diversification and the dangers of prediction.
The fact that UK Government Bonds were the best performing asset class of 2014 confounded the so called ‘experts’.
BDB’s globally diversified portfolios certainly benefitted from international diversification within the equity asset class as global equity markets outstripped the UK’s. The majority of our clients will also have benefitted from the strong performance of UK and Global government bonds due to the high quality of the fixed interest securities we hold within the ‘water’ element of our portfolios.
It has been a strong year for all of our portfolios and we are pleased with the way in which they continue to deliver diversified market returns at a very low cost.
A word of caution however. We know that past performance is no indicator of future returns and that there will be periods where the portfolios do not deliver the returns hoped for over such a short period of time. The longer that a portfolio containing risk assets such as these is held, the more certain investors can be of collecting the long term inflation beating returns targeted.
The honest answer is we don’t know what is to come in 2015. However we will be sure to continue with our disciplined and evidence based approach.
Our investment committee will continue to monitor the portfolios and challenge our beliefs and assumptions to ensure that they continue to deliver the fundamental pillars of our investment philosophy and therefore the best possible investment experience for our clients.
It’s also probably worth adding a quick reminder of our core investment beliefs (which form the foundation on which all our portfolios are built) and a summary of what we believe our role is in the context of investments:
Our Core Beliefs
Markets are impossible to predict
Markets are (generally) efficient
Risk and return are related
Not all risks are worth taking
Taking on more risk than you need is irrational
Is equivalent to a free lunch in investment terms
Diversification should be between assets and within asset classes
Portfolio construction is the primary driver of portfolio behaviour
Erode returns and need to be minimised
Compound interest massively amplifies marginal cost differences
£1 of cost saved is £1 of additional return for no additional risk
- To be your risk manager
- To guide you through the maze of risks associated with investments and help deliver your financial plan over the many years ahead
- To help minimise the risks that are not proven to be rewarded and therefore maximise the chances of success
- To construct portfolios that deliver deliver asset classes returns in the most efficient and effective way possible
- To ensure you invest in the most appropriate portfolio in keeping with your risk need, risk capacity and risk tolerance
We look forward to discussing your portfolio and risk with you at your next Forward Planning Meeting.
If you have any questions regarding your investments or financial plan at any time please do not hesitate to get in touch.
BDB Investment Committee – February 2015
 Source: FT.com 9th November 2014
 FTSE World ex UK TR in GB, FTSE All Share TR in GBP, MSCI Emerging Markets GTR in GBP, Citi World Government Bond Index TR in GBP, Citi UK Government Bond Index TR in GBP, UK 1m Treasury Bills in GBP, UK Retail Price Index in GBP. Source: Financial Express Analytics
 Cumulative performance shown and includes reinvestment of all dividends and capital gains distributions. Performance data is net of the investment provider costs but does not include deduction of fees from Brook-Dobson Brear or investment administration providers.
 RPI data is up to 15th December 2014. Source Financial Express Analytics