Costs reduce an investor’s net return and present a hurdle for any fund. This is because before a fund can outperform, it must first add enough value to cover its costs. Evidence shows that many funds are expensive to own and do not offer better net returns for the higher costs incurred. That’s why our approach is to select low-cost funds for our portfolios, and to only select higher cost funds where we can demonstrate that additional value is being added.
Capital Markets work
We are strong believers in the capital markets. Whilst they are far from perfect, capital markets do a good job of fairly pricing all available information and meeting investor expectations about publicly traded securities.
Risk and Return are related
We believe it’s impossible to improve your investment return without taking a corresponding level of risk. In other words, the potential for financial loss you expose yourself to in taking a risk is also the reason you earn a return. There is ‘good risk’ and ‘bad risk’ and higher exposure to the right risk factors leads to higher expected returns but is no guarantee of them. Risk is the premium investors pay for the expectation of a greater return.
Our role as your adviser is firstly to identify which risks offer consistently higher expected returns and which do not, and then to offer you exposure to those risks in a structured, disciplined and cost-effective way.
Asset Allocation and Portfolio Structure
At Kingswood Financial, we believe the most important factor determining the level of risk and variability of return in a portfolio is asset allocation. It is the structure of the portfolio which drives returns. There are several studies to support this view; for example, research by Brinson, Hood and Beeower suggested that 93.6% of the average return variation in a US pension plan portfolio, in the period from 1974 to 1983, could be explained by asset allocation policy mixes.
Consistent outperformance is rare
It is very hard to outperform the market on a consistent basis and even harder to pick a winner in advance of the event – both in terms of asset class or fund manager. Economic uncertainties, random market movements and the rise and fall of individual companies mean it is extremely difficult for anyone – including professional fund managers – to consistently beat the market in the long term.
Diversification is essential
Diversification is the principle of spreading your investment risk around. Our investment portfolios therefore hold the shares and bonds of many companies and governments in many countries around the world. As we believe in the power of capital markets rather than individual predictions or judgements, we can invest our clients’ assets in many thousands of individual investments. This means the negative and positive influence of each individual investment is reduced, producing less risk in our portfolios overall.