Philip Bailey of Assetfirst talks to Charlotte Moore about the rising charges on active funds and the allure of low-cost ETFs
Why did you move out of active management into the passive arena?
Market conditions have become more volatile in recent years and it is increasingly difficult to generate returns greater than the market. There are very few people who can consistently outperform the market, but the level of charges levied on a client’s portfolio is rising consistently. I did not feel that it was tenable to carry on charging those fees when I could not guarantee to outperform the market. I thought it made more sense to focus on getting a client’s asset allocation decision right and mix the assets in their portfolio according to their risk and return appetite.
How did Assetfirst evolve?
I joined Andrew Whiteley at the IFA business, Provisio Wealth Management, in 2008. He had come to the same conclusion, as I had done, that the future lay in the passive rather than active route as fees were looking high but performance was not great.
So we developed an investment process that sought to achieve the right asset allocation for each client and then apportioned that capital in the most efficient manner, typically using ETFs. We developed the first portfolios in 2008 and now that we have three years of strong performance data, we have started to offer this whole service as Assetfirst to other IFAs. They get access to the investment research and the ETF fund selection. We decided to do this because it took a lot of work to set up the systems for Assetfirst. Many IFAs do not have the necessary resources to do the same. Now that we have created it for our clients, it makes sense to offer this to other IFAs.
How do you design a client’s portfolio?
When a client comes to us we give them a questionnaire to assess their attitude to risk and also look at their financial planning needs. Once they have filled in this questionnaire, we then consider the right approach to risk given their financial needs. We can take this a step further than most IFAs. We can show them the type of return they can expect given their risk appetite because we can back-test our portfolios over 40 years. We can show them exactly what proportion of their portfolio they should have in each asset class to generate the necessary returns for their risk appetite.
How does Assetfirst use ETFs?
ETFs are the best way to create these portfolios. The analysis we carried out to create the different asset mixes for the range of portfolios we offer was based on long-term market statistics. We knew the potential risk and return of a particular market but we did not know how that could be skewed by an active manager so we decided to stick to the risks we could quantify and invest in the underlying markets. ETFs are ideal because they follow the underlying index and are cheap, transparent and liquid.
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