Paul Cleworth, director of Wealth Matters, has shifted entirely into passive-only portfolios, with Vanguard and Dimensional dominating his institutional fund picks.
Wealth Matters, of Luton, Bedfordshire, has completely overhauled its investment style since 2006.
‘Our core investment philosophy has changed over the years from 100% active to 100% passive,’ said Paul Cleworth, director of the firm.
He said he now placed three considerations at the forefront of his investment: transparency, diversification and low cost.
‘There is a lot of empirical evidence regarding passive and little, if any, to show that active management achieves a higher return over the long term,’ said Cleworth. ‘We can’t promise returns, but we do give our clients the best potential of achieving their goals within a given risk tolerance.’
The firm’s in-house investment system, called Wraps (Wealth Matters risk-assessed performance system), consists of seven core portfolios built with 15 funds (10 equity, four bond and one property) all of which are passive in nature. Six of those funds are shown in the graphs on page 52. The lowest-risk portfolio has 80% in bonds, while the highest risk is fully invested in equities.
Wealth Matters steers clear of exchange traded funds (ETFs) on the grounds of extra layers of complexity, counterparty risk and expense.
‘Many of our clients are "accumulators", paying regular premiums,’ said Cleworth. ‘When you use ETFs, you have to buy at least one whole share, which can be problematic for clients paying low regular premiums.
‘The dealing commission and bid-offer spread per ETF can be counterintuitive. It’s a myth that ETFs are cheaper than unit trusts or open-ended investment companies: it depends on which collectives you use.’
By using institutional accumulation funds, the average weighted annual management charge of the seven portfolios is just 0.28% and the average weighted total expense ratio (TER) is 0.34%.
‘Cost is one of the things you can control as an adviser,’ said Cleworth. ‘There are no cash or unit rebates with institutional funds, which keeps the pricing clean.
‘Almost all of our clients invest for growth rather than income, so it seems logical to use accumulation funds. This can be hugely uplifting in the long term, since reinvesting dividends from shares and income from bonds is a major factor in total returns. It also gives the investor discipline because it eradicates the need to manually reinvest the income generated.’
The range of 15 funds Wealth Matters uses is comprised of seven run by Vanguard, six by Dimensional, one by BlackRock and one by Legal & General.
‘If we change a fund in this 15, we do it for all clients,’ said Cleworth. ‘Usually, fund switches are administered in January and February, which is the point in the year when we perform a rebalance to lock in gains and minimise losses, as well as to reduce volatility over the long term.’
The firm has used Vanguard US Equity Index as its core holding in the US stock market for nearly three years, and likes the fund for its efficiency and low cost.
‘This fund tracks the S&P Total Market Index, which combines two leading indices – the S&P 500 and S&P Completion Index – to form a benchmark for the full universe of the US equity market,’ said Cleworth.
‘We prefer it over rival funds because of its breadth of exposure to the US market, its low cost and the fact that Vanguard is super-transparent: all profits from stock lending (which as a practice is minimal) are put back into the fund for the benefit of investors,’ he said.
Smart indexing approach
Cleworth also likes what he calls the smart indexing approach of Dimensional. He uses Dimensional for exposure to small cap UK equities, short-dated bonds and emerging markets via the Dimensional UK Small Companies, Dimensional Global Short Dated Bond and Dimensional Emerging Markets Core Equity funds.
‘Dimensional is arguably the best institutional passive provider of small-cap exposure due to its unique proposition,’ said Cleworth.
‘It doesn’t use full replication but instead samples a particular sector. This reduces trading costs as trading is less frequent than with full-replication index funds.’
Wealth Matters started using the Dimensional UK Small Companies fund in summer 2011 in place of Standard Life UK Smaller Companies Fund, which Cleworth said he found comparatively more expensive as it has a TER of 1.69% versus 0.66%.
Cleworth uses the Dimensional Emerging Markets Core Equity fund to gain exposure to Latin America, China, India and emerging Europe, and likes it for its ‘consistent outperformance’ of the MSCI Emerging Markets index over the past five years and its ‘low initial and ongoing costs’.
He uses the Dimensional Global Short Dated Bond fund to derisk portfolios. ‘The return has typically been 4%-6% per annum,’ he said.
‘This is a very popular fund in model portfolios and has very few, if any, real competitors on cost.’
Low-cost property exposure
For property exposure, Wealth Matters switched in January this year, largely because of cost. It introduced the BlackRock Global Property Securities Equity Tracker, switching from Fidelity Global Property, which has a retail TER of 1.74%. The firm’s clients pay just 0.25% on the institutional share class of the BlackRock fund.
‘The fund is relatively new, but it being an index fund, we were less concerned,’ said Cleworth.
He said although many advisers used the iShares ETF tracker to fill the property sector fund space, he did not.
Wealth Matters has held Legal & General All Stocks Index-linked Gilt Index Trust for almost three years.
‘[It is] a core part of our bond contingency,’ said Cleworth. ‘It has proved to be an excellent fund, given the low confidence in equities until recently (throughout the period of global recession and eurozone woes) and relatively high inflation. The performance has been outstanding.’