In these insights we thought we would delve deeper into how we manage our clients’ portfolios, the key factors we consider and the additional performance we achieve because of the metrics we calculate. Whilst we are forward thinking in our approach, allocating to a combination of very different underlying strategies, based upon over 30 years’ experience, there is a lot more work that goes into creating the perfect portfolio, than perhaps most people realise.
Firstly, there are several key ratios you need to understand before we analyse our current portfolio. These ratios effectively get under the bonnet of how the portfolio reacts in certain conditions, identifying how its performing for the degree of risk being taken.
Key Ratios explained
Overall Return:
This is the total gain generated by the portfolio over a given time period. Consistently positive returns, even if modest, appeal to investors seeking stability over aggressive growth.
Volatility:
This measures how much returns fluctuate, acting as a proxy for risk. Lower volatility means less dramatic swings in your investment, value-essential for those prioritising capital protection.
Sortino ratio:
This focusses on the downside risk-penalising only the negative volatility. A higher Sortino implies the portfolio rewards investors more for every bit of downside risk taken, ideal for conservative strategies.
Sharpe ratio:
This measures an investments risk adjusted return, showing how much excess return an investment provides for the level of total risk (volatility) taken compared to a risk-free asset. The higher the ratio indicates a more attractive risk adjusted return.
Maximum Drawdown:
This is the worst peak to trough loss within a certain time period that the portfolio has incurred. Portfolios with small drawdowns help reduce the chance of panic selling and capital loss, which is a standout defensive feature. It also aids a fast recovery.
Beta:
Beta tells us how much the portfolio moves in relation to the benchmark. A beta below 1 means lower sensitivity to market swings, indicating better stability in challenging markets.
Correlation:
This measures how closely the portfolio’s returns mimic the index. High correlation shows our model behaves consistently with a peer group, but it can be differentiated by better risk metrics.
Our current Low Risk portfolio (Sept 25 R234) is engineered for investors prioritising stability, capital preservation and attractive risk adjusted returns. When measured against the IA Mixed Investment 0-35% Shares index, and even versus riskier benchmarks, this model showcases compelling advantages.
So how have we done?
The charts outlined above detail these important ratios, but it’s easier if we summarise these for you in more detail. We have carefully built our portfolios to specifically capitalise upon performance, while minimising risks and maximising returns. These ratios provide valuable clarity on not only how portfolios are currently performing, but more importantly how we expect them to perform during periods of heightened volatility. We have translated this data below so you can see our methodology, and what decisions go into a portfolio to achieve this performance. When selecting suitable funds to be included in our portfolios we will have assessed these ratios already ,so when blended together in certain percentages we achieve the perfect mix.
Total & Annualised Return:
These measures indicate overall and yearly portfolio growth. Our Low-risk (Sept 25 234) portfolio would have recorded a total 1-year return of 17.23%, significantly higher than the IA Mixed 0-35%’s 6.14%. In fact, it has outperformed all three comparative indices, with lower risk exposure. Low risk with high potential return.
Sharpe Ratio:
With a Sharpe ratio of 4.94 versus the index 2.20 indicates our portfolio offers substantially more reward for the same degree of risk taken. Again, higher than all three comparative indices, the perfect scenario.
Sortino Ratio:
Focuses on downside risk, rewarding stable performance. Our portfolio boasts a Sortino of 4.23, more than double that of the index (1.97): this means losses are rare and recoveries are quicker. Again, the ratio outperforms all 3 comparative indices.
Maximum Drawdown:
The worst dip from peak value. Our portfolio’s maximum drawdown over the year is just -3.27%, in fact this is the maximum over 3 years. The comparative index is -4.33%, reflecting strong resilience. Risk and return should be considered here, with the IA mixed 40-85% shares index having a drawdown of -10.51% and yet an overall return of 10.23%.
Beta and Correlation:
Our portfolio shows a beta of 0.72% indicating less market risk than the index, and a correlation of 0.85%, so clients enjoy less sensitivity to broader market drops while still tracking core trends.
Alpha:
Reflects value added before market return. The portfolios alpha of 0.93% demonstrates skilled management and a track record of outperforming expectations.
Our portfolios are built through identifying current global investment opportunities which we will capitalise on, while considering where to allocate globally. Then we allocate to underlying investment funds, through a combination of OEIC, ETF’s and investment trusts, selecting only the best fund managers, based upon these ratios, with an unbiased independent approach. We also want to minimise clients’ fees, so where appropriate we will blend an active and passive investment approach to achieve the perfect portfolio, but not if it compromises returns.
We have highlighted our current Low Risk portfolio, but we also offer medium and high risk portfolios all of which adopt the same structure.
At any one time we have several underlying investment strategies to accommodate the Macro position and with 19 funds making up the portfolio, we have a well-diversified investment approach, effectively offering different types of eggs in different types of baskets.
We then provide a proactive advisory service, where we monitor our portfolios, and on a forward-thinking basis we will advise you immediately if any changes are needed to the underlying assets, making our service quite unique. This adds to overall performance and ensures we are always endeavouring to achieve the very best investor outcomes.
Hopefully, this provides a more detailed analysis of all the areas we are considering when creating suitable portfolios for clients.
If you would like to know more about our services, then take advantage of our free 30-minute meeting via our website www.wisifa.co.uk.
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