Global stock markets have taken a dip in the last 2-3 months during which both our fund, the CCM Intelligent Wealth Fund and our discretionary fund management, DFM, service have both underperformed world stock markets. 

This should be of no surprise to our clients who are aware that both our fund and our DFM service are higher risk investments therefore they experience greater volatility than the average. In reality is either of our investment propositions higher risk or are they simply more volatile? I would argue the latter. The graph belows explains perfectly what I mean. 





As you can see the graph covers a 10 year period of investment in a diversified portfolio of 15-18 funds for risk grades 1-10 with 1 being the lowest and 10 the highest. Although the highest risk grade of 10 fluctuates in value the most, it also produces the best return. Risk grade 1 fluctuates the least but it produces the lowest return! Which would you rather have? 

Interestingly for every single risk grade increase from 1-10 the investment return is higher than the next lowest risk grade so 2 is higher than 1, 3 higher than 2 all the way up to 10. Remarkable isn’t it?

You see volatility is not risk. Volatility is volatility. Period. A higher risk investment proposition simply experiences a higher level of fluctuations in value than a lower risk one. Does this mean it is truly higher risk? Well as long as you have at least a 10 year time horizon I think not. This assumes that you have a high diversification of risk of course.





Well both our Parmenion portfolio of funds and our discretionary fund management service with Transact and Hubwise offer a very wide diversification of risk covering at least 15 funds. As each fund typically invests in turn in 50 companies, that means that each portfolio invests indirectly into 750 shares (15 x 50). That is a huge diversification of risk. How many of these 750 companies will go bust in a year? Maybe a handful if you are unlucky. That’s just 0.66% or two thirds of one per cent. 

Furthermore no Open Ended Investment Company, OEIC, during the entire 60 year history of the Investment Association has ever failed and lost investors’ money. 

To top it all OEICs fund management companies are covered by the Financial Services Compensation Scheme of £85,000 per company. 

So in reality how risky is such a well diversified portfolio invested over a minimum period of 10 years? I would argue it is relatively low risk if you accept that the true definition of investment risk is the risk of absolute loss of your capital. Surely losing your money is a far greater risk than the mere fluctuations in value of your investment, assuming of course you are a long term investor (10 years or more), isn’t it? 

What we have found in recent months is that both our fund and our DFM propositions have underperformed the market in the short term but we remain undiminished in our belief that our long term investment performance will be excellent. Higher risk (volatility) propositions like ours perform worse when markets fall but perform better when markets rise. 

We know we are investing in great funds and great companies. However, in the short term markets can and do act irrationally. Currently we are finding a lot of irrationality in the market. For example the CCM Intelligent Wealth Fund is invested in many fantastic companies with a consistent trend of increasing profits year after year yet their share prices have fallen in recent months. This makes little sense because the main driver of share price increases is increasing profits. We know such irrationality will not last. Eventually quality shines through and such companies experience very strong share price growth. So we remain undeterred. 





We look to the future with confidence and so should you. You know it makes sense.*


*Past performance is not a reliable indicator of future returns. The contents of this blog are for information purposes only and do not constitute individual advice. You should always seek professional advice from a specialist. All information is based on our current understanding of taxation, legislation and regulations in the current tax year. Any levels and bases of relief from taxation are subject to change. Tax treatment is based on individual circumstances and may be subject to change in the future. This blog is based on my own observations and opinions.




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