What factors should be considered while adopting a particular investment strategy?

There are a number of factors to take into account whether you are planning and managing your investments yourself or getting professional advice.

We consider five key factors when undertaking investment analysis for our clients.

These are:

1. Compliance

2. Liquidity

3. Volatility

4. Cost & Value

5. Return

Perhaps surprisingly return is not top of the list; it is the one we consider after the other factors.

In this article we discuss these issues and how we manage and analyse investments to help optimise solutions for our clients.

At Black Swan Capital, we are more focused on our clients’ long-term goals than short term flavour of the month investments or asset classes. Naturally we take into account macro-economic (government policy on interest rates, tax, exchange rates etc) and micro-economic (people, businesses, supply& demand, market performance) variables, market cycles and other influencing factors, when assessing our clients’ objectives, central to our recommendations.

An important component of holding an independent license as we do, is that we make sure we have considered a suitably broad range of investment solutions from the available universe. For greatest efficiency we do this through our centralised Investment Selection Committee.

Once an investment has made it through the Investment Selection Committee, we once again assess it by these 5 factors to determine its applicability to a specific client’s needs.

We will discuss these 5 components further.

1. Compliance– it may seem obvious that a potential investment is compliant, and from an investment committee perspective it is. However, what is compliant and appropriate between one client and another can be variable. For example, an investment structure that may be appropriate for a British person living in the Benelux, might be inappropriate or non-compliant from a tax perspective for a US person living in the same place with similar needs. This reinforces the importance of tailoring and individually assessing recommendations for each and every client.

If a potential investment cannot pass the compliance test, there is no point in considering the other factors, it is rejected.

2. Liquidity– We believe this is one of the most important factors for all international and expatriate clients. One thing we have observed repeatedly in decades of looking after clients, is that life changes! This is particularly true for expats. If you are living outside your home country, whilst people are tending to stay longer, particularly in European countries, there is a chance you will move on to another location, or back home. The timing of this can sometimes be sprung upon you. Therefore, we do two things.

One, we make sure there is a high level of portability, so you do not have to liquidate your investments if you move. For the most part, you should be able to continue your investment plans and take your investments with you.

The second thing we do is make sure you always have liquidity. This means if there is an emergency, you can get your hands on your funds, without penalty or undue delay. In the past, many investment structures would lock people in for up to 20 years and if they tried to access their money, they would be heavily penalised. We believe these structures for the most part, are not appropriate for most modern-day expats and so we always ensure that you have the security of liquidity. It is an important factor that should not be overlooked.

3. Volatility– We follow the philosophy of taking on the lowest level of volatility or market risk required to achieve our clients’ objectives. As we discussed in previous articles, volatility or risk is not bad per se, it is essential to generate returns on investment. What we are ensuring is that the client is not taking on more than they require to achieve their goals. How does a particular investment correlate with the person’s personal risk profile? And how does that investment compare with its peers? These are factors we consider when assessing investments for each of our clients.

4. Cost & Value– the cost of an investment is obviously important but many of the costs can be hard to understand. You should always look for the OCF or TER (the OCF is the Ongoing Charge Figure which is the replacement term for TER, which meant Total Expense Ratio). This is the total cost of an investment. We prefer investment structures that can take advantage of wholesale pricing and cost-efficient underlying investment structures. This can result in relatively lower costs of management which is passed on to you, the investor. Lower cost translates in higher returns and you achieving your goals.

It is not as simple as cheaper is better. We differentiate very clearly between cost and value. In undertaking our analysis, cost comparisons of otherwise very similar investment structures can result in significant savings, which translate as higher net returns, for our clients.

5. Return– Performance is not just about top line return, it is about how you achieve that return. Ultimately it is net return that you generate: your investment performance returns less the costs of creating those returns. Similarly, when considering returns, it is important to see how the returns were generated, relative to risk adoption. We need to ensure the potential investment performs well in absolute terms and in relative terms both in a performance ranking and also performance for a given volatility level. Of course, you also have to consider the restrictions, and an investment that may generate strong returns, but which requires money to be locked away for extended periods, compromising your liquidity, may not be worth it.

Considered together, we make informed and smart investment recommendations that can meet your needs and allow for contingencies. That is, good net returns and peace of mind.

Whether you are managing your investments yourself, or wherever you are receiving support and advice from, we encourage you to follow a process of comprehensive research and analysis to make sure it is really right for you.

If you have existing investments in place, we are happy to review these for you to make sure you are in the optimal structure and that your investments are working for you. Feel free to contact us to get a review on your existing investments. As always we welcome any questions, you can contact us at [email protected].

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