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Smart Beta: Broome's Ben Rees adopts a mix-and-match approach

Smart Beta: Broome's Ben Rees adopts a mix-and-match approach

Ben Rees of Broome Financial Planning adopts a mix-and-match approach, investing in gold, index-linked gilts and passive global small caps for lower costs.

Milton Keynes-based Broome Financial Planning adopts a mix-and-match approach when it comes to its investment philosophy.

‘Our investment process is based on an active programme of research and quantitative and qualitative screening,’ said director and chartered financial planner Ben Rees. ‘We look predominantly for funds that have provided strong risk-adjusted returns over the longer term, and typically avoid funds with short track records, high portfolio turnover rates and opaque structures.

‘Where we believe the chances of active funds beating the index are low, we look to passive funds and exchange traded funds (ETFs) as lower-cost alternatives that will capture the index return. This reduces costs, but also means that we can predict the returns from that element of the portfolio over the longer term much more accurately,’ he said.

‘After that, we are mainly interested in tracking error analysis, stock-lending activity risk and the underlying structure of the passive or ETF vehicle.’

Physical backing

One ETF Broome has used since February 2011 is ETF Securities Physical Gold, which is backed by physical holdings. Bars of gold are held by a third-party custodian, HSBC Bank, and investors can check to see which gold bars it currently holds via the ETF Securities’ website.

Rees said: ‘This fund quite simply tracks the physical gold price. Most exchange traded commodities (ETCs) track futures’ prices, but this fund actually holds the physical metal gold bars, which means it does not risk considerably underperforming the spot price. Unlike synthetic ETCs and ETFs, it’s also not subject to swap counterparty risk, another big boon.’

Offsetting inflation risk

Another ETF the firm likes is the iShares Barclays Capital Index-Linked Gilts fund, which it has recommended since November 2011. This ETF aims to track the performance of the Barclays UK Government Inflation-Linked Bond index as closely as possible.

‘This is a fixed income fund that offers exposure to a diversified basket of UK government bonds with all maturities,’ said Rees. ‘It’s a transparent, cost-efficient and liquid vehicle that trades on stock exchanges like a normal security and can be used to offset inflation risk in portfolios.

‘We particularly like it over competitor funds for three primary reasons: strong performance track record, monthly rebalancing, and an AAA Moody’s rating.’

A more volatile option

Meanwhile, for clients with a longer-term investment horizon and a greater tolerance to volatility, Broome favours the Vanguard Global Small-Cap Index, a passive fund it has used since February 2012.



‘It is one of the few passive funds available to UK investors that follows global small caps,’ said Rees.

‘The fund differs from its index in that it holds around 15 more stocks, although the sector and geographic weightings are almost identical.’

The highly diversified fund holds more than 4,600 shares, almost exclusively from developed markets.

It is well diversified from a sector perspective, with dominant areas including financials, which account for a fifth of its assets, industrials (17.9%) and consumer discretionary (15.1%).

‘While the accumulation share class offers no income, investors have the option of an income share class that currently yields 1.6%,’ said Rees.

However, he added that this fund would not be suitable for all investors.

‘Investors in this fund can expect fairly high volatility, making it suitable only for those clients with an appropriate risk profile,’ he said.

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