BoulterBowen TechnicalBriefing

Welcome to your first BoulterBowen TechnicalBriefing of 2012. A lot has happened since we introduced PortfolioLogic five years ago, but our goal remains the same: to take away the worry from money in retirement. PortfolioLogic was designed to be a robust, straight forward, cost-effective approach to investing, to give clarity and simplicity, not increase anxiety or complexity.

Your feedback tells us we are achieving our goals although some of you would like more detail on what goes on behind the scenes and that is the purpose of this and future TechnicalBriefings.

Technical Changes to PortfolioLogic
Our December Newsletter referred to a series of planned enhancements to your portfolio for 2012 and beyond. This document gives details of the changes to the 'Secure' element of your portfolio designed to:

·       Give an increased yield on the current high quality cash and short dated holdings.

·       Protect the gains made on the fixed income (Index Linked and Conventional Government Gilt)
        element of your portfolio in 2011 and reduce potential future volatility.

There has been comment in the press recently about the status of UK Gilts. We still believe that Gilts have a significant role in controlling risk, but we are now able to access shorter-duration products than previously available; accordingly these changes are driven by more recent product enhancements than tactical decisions to time markets. This document is necessarily lengthy but, as always, if you would prefer to talk things through don’t hesitate to call.

Background
Other than quarterly rebalancing, the composition of our portfolios has changed little over the past five years. We don’t believe that it is possible to consistently time markets i.e. to jump out of one asset class at the peak and into another at the trough and our belief appears to have been vindicated. We do however, strongly believe in regular reviews to ensure that our portfolios reflect developments in the global economy and that the products available to us access market returns. These are performed and documented through our Investment Management Commitee meetings. The enhancements we now propose are a culmination of our research in the second half of 2011.

High Quality Cash and Short Dated Fixed Interest
For the last 20 years, interest rates on cash deposits provided a real return above inflation. It is accepted this is no longer the case and unlikely to be so for the foreseeable future. Consequently, anything that can be done to increase the yield on cash without compromising security or liquidity should be considered. Our position has always been that we should adopt the following priorities for cash invested within your portfolio: first seek Security, then seek Liquidity and only when you have them both consider Yield.

We don’t see it as our role to put your cash at greater risk in order to secure a marginally higher yield. Remember what happened to the Icelandic Banks? Equally, we believe that in investment, as in life generally, if it looks too good to be true, it probably is, which is why we have resisted the temptation of structured products and hedge funds.

Recognising that our clients hold sufficient cash for their immediate needs in their own bank accounts, our approach to increasing yield, without jeopardising security and liquidity, is to extend the duration of the funds we hold. This is a similar concept to holding, say, a three-year term deposit, with no exit penalties, rather than instant access cash, as we do now.

Accordingly we have decided to transfer the half of the cash we hold within the Blackrock Institutional Sterling Liquidity into the iShares FTSE 0-5 Gilt Fund launched in the last five years. As the name suggests, this fund holds conventional gilts with a maximum of 5 years to maturity, with the average duration of 2.4 years and as all of the gilts within this fund mature within a relatively short period and are issued by the UK government, although there may be short-term minor fluctuations in the price, if anything, this actually offers greater security than the current cash fund!

Fixed Income (Conventional and Index-Linked Gilts)
We hold Conventional Gilts within your portfolio to protect you from the risk of deflation, although the amounts held are modest, Index-Linked Gilts, in contrast, provide protection against inflation. As with cash, new products, not previously available to us, now enable us to perform these functions with reduced volatility, particularly important during times of market turmoil.

Conventional Gilts
The flight to safety by concerned investors, together with a regulatory requirement on banks to strengthen their balance sheets with increased holdings of secure assets, has driven up the price of long-duration conventional gilts.

We propose to reduce the duration of our holdings from 9 years within the current Legal and General Conventional Gilt Fund to 2.5 years utilising the iShares FTSE 0-5 Gilt Fund to reduce potential future volatility. This will enable us to capture recent gains whilst still giving future protection against deflation. This reallocation will be performed over the next quarter.

Inflation-Linked Gilts
Over recent years we have seen the return of inflation to the UK economy, with factors outside of our control eroding the purchasing power of the pound in our pockets. The Inflation-linked Gilt holdings within our portfolios have given significant protection against this increase.

Whilst commentators speculate that the worst may now be over, we do not see any reason to reduce our allocation to inflation-linked gilts. However, we do intend to protect portfolios from market volatility by reducing the average duration of this holding from the current 16 years, with The Legal & General Index-Linked Gilt Fund, to 9 years, utilising the recently released Dimensional intermediate Index-Linked Gilt Fund . Dimensional are a new provider within our portfolios, their mission is to deliver the performance of capital markets and increase returns through state-of-the-art portfolio design and trading. Their funds are not available directly to individuals but are limited to clients of a select group of fee-only financial advisory firms. You can find out more about them at www.dfaeurope.com.

The Big Picture
All of the above has been done with the intention of increasing yields on cash and reducing volatility on fixed-interest holdings, whilst staying true to the principles within our PortfolioLogic process. Our costs for this work are encompassed within our annual fee and the charging structure of the selected new funds should actually bring about an overall reduction in the cost of your portfolio!

We appreciate that this is a lengthy document but, as stated above, our goal is to take away the worry from money in retirement. For some that means having the detail to understand the actions we are taking, for others it is enough to know that we continue to act in your best interests. Hopefully, if you have got this far, you are one of the first group!

As ever, don’t hesitate to call or email with any questions or queries. 

Simon Boulter
Director