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NextGen investing: What we mean by the 'wealth preservation business'

NextGen investing: What we mean by the 'wealth preservation business'

Prominent NextGen planner Amyr Rocha-Lima is a keen student of economic theory. This was part of his motivation for joining Kingston-upon-Thames-based Holland Hahn & Wills (HH&W), which has an academic approach to investment.

Rocha-Lima (pictured) joined the firm in November last year and sits on its investment committee. He said the team is in the ‘wealth preservation business’. This means they focus not on predicting markets, but on diversification, finding low-cost funds and identifying established factors, such as the long-term outperformance of small cap and value stocks.

He said: ‘Our experience is, net of costs, very few active managers beat the market consistently in good times or bad. Therefore, we focus our investment conversations on: having enough cash so you never have to make a distressed sale; having the correct asset allocation; and rebalancing annually.’

Focus on value investing 

Dimensional and Vanguard funds form the core of HH&W’s portfolios. The firm’s focus on low turnover and passive funds means their offering is competitively priced. Charges range from 0.28% a year for a cautious portfolio to 0.32% for an aggressive portfolio, excluding ongoing planning fees and platform charges.

Rocha-Lima said: ‘Dimensional works closely with leading financial academics to identify new ideas and research that may benefit investors. The company was founded on the work of Eugene Fama, of the University of Chicago, who won the 2013 Nobel prize in economics for pioneering work in investment management.’

Value investing has underperformed growth investing since the financial crisis. Even so, HH&W is confident that, despite market turbulence, it can preserve clients’ wealth in the long term by sticking to its knitting.

The firm draws on factors such as size, value, profitability, default and term as driving forces behind stock and bond returns. Rocha-Lima said: ‘These factors are, consciously or subconsciously, embedded in stock and bond prices.’

Dimensional’s equity funds are oriented towards more value-based companies. So Rocha-Lima said you could argue their underperformance relative to benchmark is due to this factor premium not being positive since the financial crisis.

‘The size, value, or profitability premiums are not positive for all time periods,’ he said. ‘If they were always positive, the price would reflect that and there would be no risk, and thus the premiums would become zero.’

A robust solution 

The HH&W investment committee view bonds as a buffer between short-term cash holdings and long-term equity holdings. The firm uses Dimensional funds, which focus on high-quality, short-dated, sterling-dominated bonds. HH&W’s bond strategy is to accept minimal risk and use bond holdings as a portfolio’s ‘safe harbour’, Rocha-Lima said.

He added: ‘Additional risk in this area is unlikely to be compensated. So, given that every investor has a risk tolerance level, we believe this risk should be “spent” in an area where it will be compensated.’

HH&W run globally diversified portfolios, including emerging markets. The firm believes it has a robust solution with a blend of Dimensional and Vanguard funds for equity and bond allocations, along with an LGIM commercial property fund.

Rocha-Lima said the HH&W committee is open to new ideas to complement its investment philosophy. But it would not look for the ‘next big thing to lure investors’.

He added: ‘These ideas need to be robust and empirically tested. Therefore, we expect no more than one or two new factors to make the cut every decade or so.’

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