Consistency sits right at the heart of our investment philosophy at Parmenion.
Discrete performance reflects a specific moment in time, but it’s only by looking at consistency of rolling returns that you can really judge performance.
Markets follow cycles, where different asset classes and investment styles come in and out of favour. Aiming to outperform in every market condition is nigh on impossible, but diversification in both asset allocation and fund selection can help achieve consistency over the medium to long term.
At the portfolio level, our strategic asset allocation creates a diversified blend of uncorrelated asset classes, including Managed Liquidity, Fixed Income, Diversified Alternatives and Equity. These different asset classes behave differently in different economic and market conditions, so by having exposures to each, we can smooth out the peaks and troughs of markets to achieve a more dependable return profile.
At the individual asset class level, we diversify our exposures according to different factors, including region, sector, company size (i.e. large, mid and small cap) or style (core, growth, value). This helps reduce biases within our allocations, leaving stock picking to be the main driver of long term returns.
Take equities for example. The variability in returns can be seen in this chart, which shows leading and lagging factor styles for the past 15 years, as well as for year to date and an average across the whole period.
Source: JP Morgan Guide to the Markets Q3 2022, as at June 30. Index returns based on MSCI data.
The patchwork of colours shows that no one style is consistently in favour. In fact, the leading style one year is often at or near the bottom during the next period. For example, the momentum factor was the best performer in 2020 (29.6%) but the worst in 2021 (12.9%).
History shows that attempts to time the market as styles go in and out of favour is difficult, if not impossible. Our preferred approach is to ensure exposure to a diversified blend of factors - so while individual funds may come in and out of favour, the overall blend generates a consistent return.
This is highlighted in the charts below, which show the rolling 3 and 5 year performance of PIM Strategic Multi-Option Active Risk Grade 5 (the black diamonds in the charts), versus the respective RTMA sector (RTMA 3, split into four quartiles). As you can see, the portfolio is consistently within the first or second quartile over these periods.
Source: Parmenion, FE fundinfo
RTMA Risk Target Multi Asset (RTMA) is a peer group analysis provided by FE, comparing the performance of multi asset funds. Parmenion use a composite benchmark to report against, RTMA issued here for peer comparison only. DFM fees and underlying fund OCF are included within performance figures for both Parmenion portfolios and the multi asset peers.
Past performance is no indicator of future returns and investors could get back less than they put in. There is no guarantee the solution or funds will meet their objectives.
Presented as a simple line graph, you can see how the rolling 12- and 36-month performance of PIM Strategic Multi-Option Active Risk Grade 5 looks versus the same RTMA 3 sector (blue line), over the 5 years to 31 July 2022. Another example portfolio in the same RTMA 3 sector is included for comparison (red line). While the blue line is relatively smooth, reflecting consistency of performance over time, the red line is more erratic.
Source: Parmenion, FE fundinfo
RTMA Risk Target Multi Asset (RTMA) is a peer group analysis provided by FE, comparing the performance of multi asset funds. Parmenion use a composite benchmark to report against, RTMA issued here for peer comparison only. DFM fees and underlying fund OCF are included within performance figures for both Parmenion portfolios and the multi asset peers.
Past performance is no indicator of future returns and investors could get back less than they put in. There is no guarantee the solution or funds will meet their objectives.
While there are many different investment approaches, each with their individual merit, we believe the pursuit of consistency is key to achieving client outcomes in line with expectations – the consistent aim for all of us.
This article is for financial professionals only. Any information contained within is of a general nature and should not be construed as a form of personal recommendation or financial advice. Nor is the information to be considered an offer or solicitation to deal in any financial instrument or to engage in any investment service or activity.
Parmenion accepts no duty of care or liability for loss arising from any person acting, or refraining from acting, as a result of any information contained within this article. All investment carries risk. The value of investments, and the income from them, can go down as well as up and investors may get back less than they put in. Past performance is not a reliable indicator of future returns.