Managing risk for optimum return

by | Oct 28, 2022

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Financial advisor diversified portfolio

At Brooks Macdonald, everything we do is designed with advisers and their client’s needs very much at the forefront. At the heart of our investment approach for the Cornelian Risk Managed Funds, is our conviction that the investment portfolios we build for our clients should contain, what we believe, is the best selection of investments to meet investors’ objectives and to stay within their risk tolerance. In deciding what is best, we aim to avoid being influenced by artificial constraints that might restrict us in our choice of either the mix of assets or the investments themselves. However, below are noted some examples of approaches that can restrict an investment manager from selecting investments in the best interests of investors:

Tracking benchmarks or market sectors with prescribed asset allocation percentages

One of the clearest illustrations of the dangers of this approach occurred during the dotcom boom, a bubble that burst in 2000. As the prices of technology stocks increased dramatically, so did their weighting in the main indices. Therefore, although many investment managers had been wary of the bubble in the technology sector, there was considerable pressure on managers benchmarking performance against an index to hold technology stocks.

It is to avoid this type of constraint that our Risk Managed Funds range does not sit in Investment Management Association (IMA) sectors. Although for our individual private client portfolios we are obliged to agree a benchmark for comparison purposes we are careful not to allow this to interfere with our focus on the priority of generating real returns for clients.

Low cost at all costs approach

Some investors believe that the best approach is simply to purchase passive investments that will track indices. As a result of the removal of investment decision-making, this approach usually incurs low fees. There are circumstances in which a passive investment is an excellent way of getting short term exposure to a market or in some very efficient markets where it is difficult for fund managers to outperform the index.

However, for a portfolio diversified across different asset classes and regions there are also many circumstances in which significant value can be added by using active investment managers. It is for this reason that we do not believe that our clients are well served by adopting a rigid approach to always buying passive or always buying active investments. One of the tests we apply to each investment is whether it is likely to deliver value for money for our clients.

Historical asset allocation models

Often financial advisers develop asset allocation models designed to meet a range of different client needs. However, these models can remain rigid for some time, and we frequently hear of rebalancing back to models put in place well over a year earlier. This focus on an asset mix that may have been appropriate in the past is a dangerous one and ignores the fact that different asset classes will have different valuation characteristics at different stages in the economic cycle.

Our approach is to review our portfolios on a regular basis to identify the optimal asset allocation position and move to that asset allocation rather than to be constrained to look backward to a mix that may be outdated and overvalued.

Risk bands with upper and lower levels

In recent years there has been an ever-increasing regulatory focus on the appropriate level of investment risk that should be taken in investors’ portfolios, and profiling tools have been created to assist financial advisers and their clients in the selection of the appropriate investments.

Unlike most of our competitors who offer risk targeted funds, our fund range is managed to sit below investors’ upper risk limits but with no lower limit. In line with our unconstrained philosophy, we believe that if it’s prudent to reduce investment risk in our portfolios, our investment managers should be free to do so. If a market shows signs of starting to decline, we should not be forced to put more risk into the portfolio to maintain a risk level that might not be prudent in the conditions.

Whether investments are held in individual segregated portfolios or through the Cornelian Risk Managed funds, our investment teams focus on investments that will add real value to the investor’s portfolio over time, with the objective of delivering investment returns that exceed inflation by an appropriate margin, to reward clients for the level of investment risk they’re prepared to take.

For more information on the Cornelian Risk Managed Funds and Cornelian Risk Managed Passive Funds range visit the Brooks Macdonald website


Important information

Investors should be aware that the price of investments and the income from them can go down as well as up and that neither is guaranteed. Past performance is not a reliable indicator of future results. Investors may not get back the amount invested.

Changes in rates of exchange may have an adverse effect on the value, price or income of an investment. Investors should be aware of the additional risks associated with funds investing in emerging or developing markets. The information in this document does not constitute advice or a recommendation and you should not make any investment decisions on the basis of it.

Brooks Macdonald Asset Management Limited is regulated by the Financial Conduct Authority. Registered in England No 03417519. Registered office: 21 Lombard Street, London EC3V 9AH.

Brooks Macdonald International is a trading name of Brooks Macdonald Asset Management (International) Limited. Brooks Macdonald Asset Management (International) Limited is licensed and regulated by the Jersey Financial Services Commission. Its Guernsey branch is licensed and regulated by the Guernsey Financial Services Commission and its Isle of Man branch is licensed and regulated by the Isle of Man Financial Services Authority. In respect of services provided in the Republic of South Africa, Brooks Macdonald Asset Management (International) Limited is an authorised Financial Services Provider regulated by the South African Financial Sector Conduct Authority. Registered in Jersey No: 143275.  Registered office: 5 Anley Street, St Helier, Jersey, JE2 3QE.

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