“Let’s talk about performance”, letter to investors from Moneyfarm’s CIO

Dear investors,

Let’s talk about performance. In my seven years as CIO at Moneyfarm, I’ve spoken with a lot of clients and performance is the one thing that comes up most often.

And the focus on portfolio performance is understandable. You invest to see your capital grow, takings steps not just towards your financial goals but your goals in life, be they paying for your children’s college education, retiring more comfortably, or buying your holiday house on the seaside.

What does our Asset Allocation team, at Moneyfarm, do to help you get there? We design, manage, and monitor your portfolios to achieve solid, long-term returns with a strong focus on risk management. A few principles guide us. We focus on macro fundamentals. We believe that the time horizon is an essential advantage to exploit.  We think costs are the only factor that is truly controllable. Finally, we believe that managing risk is as important as chasing returns.

At first glance, it’s easy to talk about performance – it’s just a number in the end – while it’s much harder to talk about performance in the broader context of these principles. Does it make sense to look at performance without taking into account how much risk was taken to achieve it? Or the time horizon considered? Or without looking at the macro and market context? It doesn’t.

But this doesn’t mean we can’t talk “just” about our performance, as even if it is “just a number”, it is the most important number for our clients. Over the last five years, five out of our six UK portfolios which we compare to ARC showed a better Sharpe ratio – one of the most widely used methods for measuring risk-adjusted relative returns – versus the comparable ARC indices. This means that, in that timeframe, our portfolios are generally lower risk than comparable peers, while still generating a good performance for our customers.

We think risk is an important part of the conversation. It is something that can be very easily overlooked when it doesn’t materialise, while can become a huge reason for worrying if it does. It’s one reason why ex-post performance analyses may not tell the whole story. With hindsight, risks have been resolved, one way or another, and that number, the positive or negative number that shows how much your capital grew (or decreased), is considered as if risks never existed in the first place.

Time horizon is another important thing to consider. Indeed while us asset managers have the opportunity to look at 3, or 5, or 10 or even 30 years’ performances, when we look at our model portfolios or backtest them, for many clients short-term performance is the “only” performance they ever saw. Many may have started investing recently, and nobody likes to start a long-term investment journey with a negative figure. 2022 in this sense has been a challenging year for everyone: think about the fact that the US stocks and bonds market have both given negative returns only four times in the last 90+ years: in 1931, in 1941, in 1969 and – you guessed it right, last year, 2022. 

In this regard, I’d like to take this opportunity to dig a little deeper into what we did in 2022 for our customers. First, we tried to manage risks and protect our customers’ portfolios: in a rising interest rates environment, we chose not to own long-dated government bonds, helping our low-risk portfolios hold up better to this scenario. At the same time, our equity exposure was quite conservative, shielding – to some extent – our portfolios from the decline in global equity markets.

Clearly, there are things we’d have done differently with the benefit of hindsight. On the equity side, we reduced European equities to manage the risk of a potential energy crisis prompted by the war in Ukraine. Happily, that risk didn’t materialise and European equities performed relatively well. Thankfully, this was a small adjustment into a market that also rallied so the end result was not too detrimental for our portfolios. With hindsight, we’d have owned more European equities in our portfolios than we did. But would have taken on more risk to do so? We don’t think so. Our portfolios were designed to manage your money for the long term in a risk-controlled way. 

By the way, when it comes to selecting funds, picking last year’s winners may not be the best way to achieve long-term success. Indeed, Moneyfarm’s target has never been to get the best result in the short term. We aim at producing solid returns for you in the long term, with strong risk management. 

Remember, we don’t have to build portfolios to sell you an investment product to hold for a year, taking on a lot of risk to generate performance, and then, if things go wrong, simply dismissing it and launching another one. This is unfortunately common in the asset management industry: according to figures published by BCG, almost 80% of all ETFs and about 60% of all mutual funds that launched in 2018 closed by 2021.

On the other hand, we at Moneyfarm aim to build portfolios that can accompany you over the long term – to help you achieve your long term goals – for your retirement, to provide for your family or fulfil some long-held dreams. This is one of the reasons why I am proud to be the CIO of Moneyfarm.

Richard Flax