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Our investment process

Brompton’s asset management team provides discretionary investment management services to private clients, family trusts, charities and companies. We aim to deliver real returns over the long term through dynamic asset allocation because increasing the power of clients’ investments is central to their long-term investment needs. Our private clients range from younger investors aiming to achieve capital growth within their personal pension funds and ISAs to older people seeking incomes from their retirement savings and charitable and trust fund trustees.

Dynamic asset allocation

Dynamic asset allocation is at the heart of the Brompton private client investment process because we believe this will be the principal driver of returns for our clients. Two major bear markets since 2000 have made investors aware of the importance of choosing an asset manager focused on determining if the environment is one in which investors will be rewarded for taking risk rather than simply seeking to deliver a relative return.

Our dynamic asset allocation approach gives us the flexibility to invest globally on behalf of our clients in all major asset classes. It is the principal means by which we aim to add value to our private clients’ portfolios. Our objective is to select the right asset classes, geographical areas and investment themes at the correct time in the investment and economic cycle. This is a demanding task and we have developed our asset allocation process in response to this challenge.

First, we use the information conveyed by numerous economic data releases to build up a picture of the outlook for the global economy. Secondly, the message conveyed by the data is combined with our knowledge and investment experience to determine which investments are likely to perform well in the prevailing economic conditions. Thirdly, we analyse the valuation case for these assets to identify the genuine investment opportunities.

We recognise the importance of building portfolios that are not wholly dependent for their success on a narrow range of investment outcomes. We, therefore, combine the assets in clients’ portfolios to offer a measure of protection for their investments under a range of different scenarios. Careful consideration is also given to the implementation of our investment decisions and we use momentum and sentiment indicators to help refine our timing.

We use information from many sources, not just macro-economic data releases, in coming to our views. We invest in economic research produced by selected economists and strategists in order to challenge and improve our decision making. Our investment process involves frequent meetings with specialist managers investing across the spectrum of different asset classes and regions and we also draw on their observations and experience when reviewing our strategy.

We focus on our strengths and only invest in high-conviction ideas, seeking to avoid consensus thinking. Our consistent emphasis on forward-looking data and our strong valuation discipline often lead us to consider out-of-favour assets and help us avoid over-hyped markets and investment bubbles.

A proper respect for investment risk

Diversification is one of the most powerful concepts in asset management, allowing managers to reduce risk through investment in a range of different assets. We seek to manage the risk in our clients’ portfolios by diversifying across a number of different asset classes, geographic regions, currencies and investment themes. The portfolio construction process is designed to ensure that performance is not narrowly dependent on one central outcome, with all investments likely to move together. We consider how our clients’ portfolios will be affected by a wide range of different outcomes. Our range of investment strategies allows clients to select the level of risk appropriate for them.

Investing in funds also allows us to diversify risk at the individual security or underlying asset level. In a typical Brompton private client portfolio of 15-20 funds, each fund will hold a broad range of underlying investments. This means that when these funds are combined in a client’s portfolio the contribution to risk from any one individual security is small and the principal driver of performance will be the overall asset allocation strategy enhanced by the returns from our fund selection process.

We analyse the level of risk at every stage in the process of portfolio construction, including the volatility or risk of the underlying funds in which we invest on clients’ behalf as well as the level of risk inherent in our investment strategies. We utilise specialist risk analysis software to help us quantify and manage risk but we never surrender our common sense. Many risk assessment models rely too much on the historic relationships between assets and can sometimes underestimate the real level of risk. In particular, they do not work well in times of market stress when the correlations between asset classes can rise.

We do not stand behind a faceless investment committee when accounting for the decisions we make on behalf of our private clients. Responsibility for investment strategy ultimately rests with our chief investment officer, who is fully accountable both internally and to our clients.

A fund of funds approach to investing

Our fund selection process identifies specialist managers in our preferred asset classes, regions and sectors. We invest in funds managed by external managers on behalf of our private clients because we believe this approach will lead to outperformance. Clients typically invest in a focused portfolio of 15-20 funds. Some funds in which we invest are managed by established industry names; others are from emerging boutiques with expertise in key areas.

Once we have decided to invest in a particular asset class, we choose that which we consider to be the best fund in that sector to meet our objectives. We do not think it is credible for one single investment house to claim to have a monopoly over investment talent and excel in all areas. Our fund selection process has been developed to identify the most talented managers wherever they might be. We do not invest in other Brompton products.

We use our scale and buying power to gain access to some of the most successful managers and secure favourable terms. We have a transparent fee structure and we do not profit from transaction fees. We do not retain commissions or rebates that may be generated within client portfolios.

We take an active approach to fund selection, preferring to invest with independent-minded managers rather than adopting an indexed or passive style of management. We have a preference for managers who show genuine commitment, either by investing in their own OEICs and unit trusts or through equity ownership, but above all our approach to fund selection is pragmatic.

We will, however, consider all available investment vehicles when determining how best to gain exposure to a particular asset class. Thus, we may invest in funds that mirror a particular benchmark or index if we cannot identify an actively-managed fund with the potential to meet our clients’ needs consistently and we decide that a passive investment is the most effective means of gaining the exposure we seek. Where we invest in funds of this nature such as exchange-traded funds, we will only do so if the investments are backed by the underlying assets. We may sometimes invest in investment trusts.

Our fund selection process sifts through an investment universe of more than 30,000 funds looking for successful managers. We seek to identify managers who have not just delivered good returns but who can demonstrate consistency and have justified the level of risk they have taken. We use quantitative tools to help in the early stages of manager selection but the final decision is a subjective one. Once we have invested in a fund we continue to monitor it closely and meet the manager regularly.

Building your portfolio

The results of our investment process are used to create a series of investment strategies to suit the diverse needs of our private clients. Our strategies are designed to match the long-term investment objectives and risk appetites of most investors. Clients select the most appropriate strategy for them from our Conservative, Balanced, Income, Higher Income, Growth, Equity and Unconstrained strategies.

The Brompton Unconstrained strategy is specifically designed to meet the needs of ISA investing. We also offer a range of funds that are consistent with six of our strategies. These funds are sub-funds of the FP Brompton Multi-Manager OEIC and all are eligible for inclusion in an ISA. All the strategies are dynamic and change as our investment thinking evolves. Our investment committee meets quarterly on a formal basis to review the performance and investment risk management of our strategies.

Once a strategy has been selected then this acts as a starting point for further detailed discussion of a client’s investment needs. We recognise that there may be a need for a degree of flexibility at the asset class, geographical and specific investment level. Clients may have other financial assets outside their investments with us and these will have a bearing on the composition of their portfolios. We have a number of clients, for example, with significant property interests elsewhere who have selected the appropriate Brompton strategy but with a specific restriction relating to property investment. The funded investment approach provides the flexibility to meet specific client needs while retaining the integrity of the investment process. Please note that Brompton does not offer investment advice and, therefore, cannot advise on which strategy is the most appropriate for a client’s portfolio.

Security of assets

Brompton provides discretionary investment management services to its clients but does not take custody of client assets. We recognise that this segregation of responsibilities is important to many clients. We organise for clients to have their assets held with one of the world’s largest global custodians or alternatively they use their own custodians.

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