200930 Evans Hart Investment Planning September 20

A summary of the theory and practice for the Evans Hart simplified global model investment plan.

Hello this is stephen evans and i’m making a a short presentation about the theory and practice behind our investment advice and the model that we use investment managers usually use a model which is like a road map to show how they plan to get their client the investor from their current position to their future goals which may for example be to provide a

Given level of income in retirement or to provide for members of the family but whatever the goals you do need a road map or a model to follow in order to get you there i’d like to start by showing this chart of the world stock market values and you can see that um the united states is by far the largest um stock market in the world with 54 percent of values

At the end of december uh to 2019 the united kingdom has shrunk to five percent um 15 years ago it was 10 or 12 percent so there’s been quite a change in the world allocation of the investable marketplace china is now six percent uh in terms of its investable shareholdings which international investors can access so clearly emerging markets um of which china

Is the largest are growing in importance and um our approach is to is as a global investor to look at the whole investable universe and allocate our resources across all world markets broadly in line with the size of each each market that there is also a um very important um bond or fixed interest securities market um uh which forms an important part of any

Investment portfolio and the market consists of both governmental fixed interest securities that’s short-term treasuries or longer-term 5 10 15 20-year bonds where the issuer undertakes to repay the capital at the end of the given period and to pay a rate of interest in the meantime so it’s like a a fixed term loan um and both um governmental and corporate um

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Bond issuers are um very important and uh this um chart represents um what are called investment grade bonds which are the safer end of the market as opposed to high yielding junk bonds or some emerging market bonds so we always incorporate bonds within a portfolio to reduce the volatility and the risk and to provide a stabilizer to the shareholdings which are

More volatile this chart over 30 years shows how different asset classes have performed and if we take an investment in government treasury bills uh over 30 years if you had invested and reinvested the interest income one pound would become four pounds over 30 years if you had invested in the world stock market uh holding perhaps in a fund across all the 12 000

Shares across the world stock market one pound with dividend dividends reinvested would become 13 pounds but it’s interesting to note that that the smaller companies have produced a higher return over 30 years of 22 pounds compared to 13 pounds smaller companies are defined as the bottom third of the market in terms of company size and across the world the average

Market value of those companies defined in that way is about two billion pounds so they’re not really small companies uh companies such as rolls royce and um uh and um standard live a lot of what we would call substantial companies would be in the small company category on world scales then also we can see that value companies have also outperformed the market

Substantially um and value companies are those where the share price is relatively low compared to their net asset value so in other words they’re companies which for one reason or another are currently trading at a cheap value and by investing systematically in those value companies the long-term effect is that you can achieve a higher return than the average

For the market as a whole and then you’ll also notice that emerging market returns are significantly higher than the average but again emerging markets are more volatile they’re more risky but as part of an overall portfolio it does make sense to include a a proportion of emerging markets now the reason that we hold bonds in the portfolio is demonstrated by this

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Chart which shows what happened during the financial crisis of 2009 to 2000 2009. during that um 18-month period global equities fell by 37 um property funds fell even more but the interesting thing is that investment grade bonds um rose by 10 and treasuries by 14 and this is because they were safe haven assets and if as an investor you were already holding

These low-risk assets when there is a crisis and investors move into a safe haven the value of your holding will therefore go up and it will mitigate the loss that you may have on on shareholdings so we’ve arrived at a model portfolio and we’re able to simplify it while still getting all the benefits of diversification so in this particular case this is what

We call a 60 40 equities to bond model portfolio the bonds are diversified across all world markets but are investment grade and above uh working with our selected investment partners dimensional and vanguard both of whom put a provision of um value for the customer as their top priority um they are by far the lowest cost providers of funds in the marketplace

And the overall um fund cost of this model portfolio is 0.32 per random so 40 in bonds and 60 in equities diversified across all world markets with a weighting towards smaller companies and value companies and with a uh appropriate exposure to emerging markets so this is our roadmap so we’ve been able to refine the model and test it and ensure that it provides

All of the diversification and other benefits and risk management and so we will be discussing with you how we would move um from your current model to this simplified global model um at an appropriate time and then if we look at the possible outcomes from following this strategy um our investment partners vanguard who are one of the largest asset managers in

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The world have a a very strong research capability and they do make um a a forecast of possible returns from um standard portfolios over the next 10 years so for example for a 60 40 portfolio they are saying that the annual return is likely to be in the region of about 4.6 per annum i mean there’s a range of possible outcomes but that’s the midpoint as you go

Up the risk risk scale with a higher proportion of equities to bonds that expected return does increase these returns are lower than in some previous periods but the the good news is that they do expect positive returns from a mix of shares and bonds and returns above inflation they would expect inflation to be less than two percent over the coming um coming

Period but of course these are average annual returns um and there will be years when returns are negative and when they’re higher than this so this is an average it’s important to to remember that and then finally i would just like to underline the risk warning there is a risk investing in shares shares can go down as well as up particularly in the short term

We advise people on long term financial planning and therefore a long term investment strategy is suitable for that long-term view of building up funds for retirement building up funds to help the next generation so um as long as you’re um aware of the medium to long-term nature of the planning then um this can be the right solution for you well thank you very

Much for listening and please do let me know if you have any queries goodbye

Transcribed from video
200930 Evans Hart Investment Planning September '20 By Stephen Evans