Investing with the stars: Carl Roberts' passive persuasion –

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Carl Roberts, managing director of Milton Keynes-based RTS Financial Planning, bases his investment proposition on the ideas of influential authors. He particularly likes Carl Richards’ The Behavior Gap, which underpins RTS’s mainly passive approach.

‘Our client money is 95% invested passively because it’s easy to explain to clients,’ said Roberts (pictured). The main point for Roberts is that active managers can outperform benchmarks, but only before costs are taken into account. ‘Richards is brilliant at explaining that simply,’ he added.

By the book

Roberts also highlighted Richards’ concept of the ‘behaviour gap’. This is the difference between ‘investment returns’ and ‘investor returns’.

Investment returns are the returns you get from holding what Richards calls ‘an average mutual stock fund’ for the long term. Investor returns are those obtained by moving money in and out of stock funds to achieve higher returns. Richards pointed out returns for the latter are, over time, far lower than returns from average investments owing to behavioural mistakes such as selling at the wrong time.

Another favourite is Tim Hale’s Smarter Investing. ‘He’s also good at proving the passive model, outlining how to set up asset allocation, and explaining behavioural finance,’ said Roberts. Hale cites research from US financial consultants Dalbar, which shows ‘investor returns’ were around 4% a year for the 20 years to 2010, while ‘investment returns’ were almost 10% a year.

Roberts also takes on board the insights of investment guru Warren Buffett, gleaned from The Essays of Warren Buffett. He admires Jim Slater’s The Zulu Principle, which explains how to analyse small companies to exploit the small cap investment factor. In addition, he uses the adviser support tools on Vanguard’s website.

All bases covered

One of RTS’s main recommendations to clients is Parmenion’s Strategic Passive portfolios. ‘A partner like that is useful, even if you only use them for passive and ethical solutions,’ said Roberts. ‘The market is getting big and independent advisers must ensure all investment options are considered. Using an independent service makes sure all relevant investments are looked at. We like Parmenion because it has no interaction with clients and its investment process is robust.’

For clients in accumulation, or who already hold a lower cost pension, other offerings may be more appropriate than Parmenion. In these cases, RTS might use funds or portfolios such as Standard Life MyFolio, Vanguard LifeStrategy, and Legal & General Multi-Index.

Parmenion’s Strategic Multi Option Passive – risk grade 6 outperformed the Investment Association Mixed Investment 40%-85% Shares significantly in 2015, but trailed it in 2016 and 2017. Roberts said one reason for this performance was that the portfolio had no emerging markets exposure. This supported performance when emerging markets fell but hampered it when they rebounded in 2016 and 2017.

Roberts said Parmenion’s portfolio had outperformed over three- and five-year terms. ‘They don’t have emerging markets exposure in portfolios one to six, as it is too volatile. But they do have it in seven to 10,’ he said. ‘If someone wants emerging markets exposure then they want more risk. So, if appropriate, we can recommend a higher risk portfolio.’

Crash course

Roberts is unperturbed by the latest market correction. He disagrees with the view that investing in passives is dangerous because it forces you to fall with the market.

‘Since 1999, the market is only up a few percentage points. Even at its height, it was only around 10% up,’ he said. ‘Most clients are investing for 20-plus years. But, anyway, if you’re accumulating, a crash is a good thing. Even if you are just investing a lump sum now, you’re still dividend reinvesting and so gradually buying more units. For retirees, the conversation is more about [reducing risk in portfolios].’

He pointed out how the same is true of top-heavy bond markets. ‘They’re overpriced, and we should prepare for lower returns, but there’s little alternative if you want risk control,’ he explained. ‘Bonds aren’t there to deliver returns, but to put a brake on stock market crashes. As their prices fall, you get higher yields.’

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