While what we offer our customers may be simple, there’s a lot that goes on behind the scenes to make it happen. To give investors a portfolio that suits them, Moneyfarm has implemented a multi-stage process, in which every step is vital in providing the best experience and investment solution.
Before we can confidently assign an investor a portfolio, we need to understand the goals and the profile of the investor, review our products, select the best possible solution and support the investor’s cash-flow management.
In the second post in our series Our Investment Strategy, we’ll break down each stage of this process to give an idea of just how much consideration and balancing that goes into each individual portfolio we provide.
Understanding your risk profile
Firstly (and perhaps most importantly), we have to assess the investor’s personal attitude to risk alongside their financial goals. The question of “What is a good investment?” is not universal; a high risk taker client will be unsuited to a low risk portfolio and vice versa. The quality of any investment cannot be evaluated without considering the utility the investor will gain from it.
We weigh up the investor’s goals, their time horizon, their financial situation and their ability to absorb any short-term volatility in the markets. Broadly speaking, the longer a person is investing for, the greater the amount of risk they can comfortably take on – there is more to it than this, but that’s a fundamental rule of investing. When someone opens a Moneyfarm account, they answer a short series of questions to give us a better understanding of them and their situation.
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Like everything we do, the investment process is only automated to a degree. We leave some flexibility to the discretion of the investors, allowing them to increase or decrease their portfolio’s risk by a maximum of one level. We also periodically assess the client’s situation to ensure that we’re on track – this is then up for discussion with one of our investment consultants, if the customer wishes.
Our model portfolios
Since the number of individual investor preferences is potentially infinite, we would theoretically need an infinite set of portfolios to meet every customer’s expectations. This would only be effective in a world with no uncertainty – in the real world, we need to move from an infinite set of solutions to a discrete one.
Our customers are assigned a portfolio numbered between 1 and 7. The lower the number, the lower the exposure to risky assets. The P1, then, is made up primarily of bonds, while the P7 has a clear weighting towards equities. A big part of our portfolio construction service is determining exactly where each individual investor sits across this spectrum.
Our asset allocation process
So, we’ve established how we assign portfolios to our customers. The final stage of this process is by far the most complex: asset allocation. This is the process of taking our clients’ funds and assigning them to the various assets that make up their portfolios. The process is made up of three stages, which can be best summarised as:
- Forming long-term expectations for risk and return for each asset class
- Combining them in order to create a set of portfolios (one for each risk profile). This is called Strategic Asset Allocation (SAA), since it relies on long-term assumptions
- Adjusting this Strategic Asset Allocation to reflect our tactical view, in what we call the Tactical Asset Allocation (TAA).
We’ll go into more detail about how we build our portfolios in a later Investment Strategy post. The key is that each stage is vital in not only ensuring our portfolios are suitable, but ensuring that they remain suitable as assets rise and fall in value.
For our customers, the Moneyfarm proposition is straightforward. You answer some questions, are assigned a portfolio, then fund that portfolio and leave us to manage it on your behalf. This simplicity is deceptive; we have teams of experienced portfolio managers monitoring the markets daily to ensure that our portfolios are fit for purpose. From the initial assessment of the client to the asset allocation process, Moneyfarm does the legwork so that our investors can spend more time doing what matters most.