How Top 100 IFA Chadwicks uses passive equities to beat inflation

NMA INVESTOR

For Norwich IFA Chadwicks, portfolio management is about trusting markets and keeping faith in passives.

BY NICOLA BLACKBURN

NMA Investor is the new home of content for advice firms that build their own portfolios,whether they use active or passive funds. In this piece, we speak to Chadwicks associate director James Bacon about trusting markets, keeping faith in passives, and Chadwicks’ unique portfolio construction.

For Norwich-based IFA Chadwicks, beating inflation has been about going back to basics.

Sticky inflation in recent years has weighed on both bonds and equities, leading some portfolio managers to seek other sources of diversification and return, from money market funds to alternative assets.

But speaking to Citywire New Model Adviser, James Bacon, an associate director at the firm, said equities were doing the job, something the firm is relying on for its in-house portfolios.

‘When you look at where returns come from, the real returns really come from equities. You don’t really get much protection from bonds,’ he said.

‘Over time, we’ve shifted our balanced portfolio to up to 70% in equity and over time, you work with clients and they get more used to market cycles, and buy more in to our approach.’

With mainstream asset classes under pressure with inflation high, wasn’t it difficult to justify poor performance in portfolios?

Admitting it was a ‘long 18 months to two years’, Bacon said equities were ‘still the best investment to beat inflation, you just have to be patient with it’. ‘It doesn’t happen from one year to the next, it’s over multiple years that you’ll outperform inflation. Clients fortunately bought into that story and just held on,’ he added.

Going back to basics is an idea that is core to Chadwicks’ investment proposition.

The NMA Top 100 firm, also a finalist in the NMA Awards’ East of England category this year, has run portfolios in-house for years, underpinned primarily by passively-managed funds. The firm manages a portfolio range for its 200 clients that blends passively-managed equity and bond funds with actively-managed alternative funds, tailored to different risk profiles.

Chadwicks takes a market-cap-weighted approach to asset allocation, reflecting the firm’s view that markets are ‘efficient’ and are pricing assets well, according to Bacon.

‘It’s very, very hard to forecast markets, isn’t it?’ he said. ‘You think you could have an idea of possible alpha generation, but then the market doesn’t always respond in the way you’d expect.

‘All we can really do is focus on the long term – that markets trend upwards over time, that it’ll be a rocky road, and we accept that.’

Attempting, and not succeeding at, timing the market is an experience Bacon knows first-hand as a former investment analyst. ‘We could spend a lot of time researching funds and there’s no guarantee that that’s going to lead to outperformance. I was frustrated that I was doing all this work and it didn’t seem like it was ever paying off.’

How the investment process works

Chadwicks runs two in-house portfolios, managed on an advisory basis: a defensive and a growth model. Clients are invested in a bespoke blend of the two. The defensive portfolio invests 70% in global bond funds and 30% in alternatives, while the growth portfolio invests 70% in global equity funds and 30% in small-cap and value equities.

The firm’s investment committee – which includes a finance professor from the nearby University of East Anglia – meets every quarter to review portfolios. The firm has also sought ad-hoc investment advice from Vanguard and Dimensional in the past, favoured by Chadwicks for ‘being governance based’ and for their use of low-cost passive instruments.

Chadwicks also constructs its own in-house benchmarks – a blend of the FTSE All Cap index and the Bloomberg Global Aggregate index – to track performance. Performance for a typical Chadwick balanced portfolio has generally fallen in line with its benchmark over the short and long term:

For Chadwicks, the appeal of running portfolios in-house comes down to control – being able to design and construct portfolios itself. One benefit of this is tax mitigation, the ability to hold different sectors of client portfolios in different tax wrappers. While classed as bespoke portfolios, which tend to be more expensive than models, the portfolios carry a fee of around 20 basis points.

Does the additional work running portfolios in house outweigh the benefits? Not according to Bacon, who told NMA that Chadwicks’ back to basics approach worked well for clients in the long-term. ‘We think that if clients can understand what they’re invested in, they’re more likely to stick with it,’ he said.

‘You could have the best portfolio in the world, but if the client doesn’t stick with it they’re going to basically destroy their wealth.’