I love June in the Isle of Man as the Island comes alive with all the petrol heads mad to see the famous TT motorbikes races in the road racing capital of the world. For the racers, it is like investments; they have to take risks to make a return… but too much risk and there is no return!
Working in Business Development, TT is often a quiet time for me- but not this year… however, more on that later.
Followers of Capital International Group will be aware that we have recently launched a USD version of our PRISM investment service. This has received positive feedback from our international client base, along with a number of questions and requests for further information. One such request was to ask us for details of a typical client that uses PRISM, and if we could provide a case study of an existing client. So I thought it would be useful to blog about what we shared with that IFA.
Before I share that client scenario, here is a quick reminder of the key benefits that PRISM offers:
- Low Cost at 0.25% combined investment management and custody fee.
- Low Minimum from GBP15,000 or USD20,000.
- Flexibility of no lock-in period or exit penalties, and free switching between risk-return profiles.
- Risk Range offering a number of different risk-return profiles from near cash-style risk and return strategies at the cautious end, to high growth and volatility at the other end of the risk spectrum.
- Defined Risk-Return Profiles, which each having a defined mean return, as well as a defined level of volatility (risk), providing transparency of performance expectations to clients.
- Proven Track Record; all risk-return profiles have consistently remained in line with their performance expectations over time.
Client Case Study
The client scenario we outlined was an affluent individual aged 55, who is still working in a good professional occupation with a lump sum to invest. General requirements were as follows:
- Likely retirement in 7-10 years, although circumstances could result in that being pushed back by a few years, or brought forward to 5 years, albeit that was less likely.
- Upon retirement, a small draw down was expected of 2-4% per annum.
- Very cost-conscious client.
- Concerned about current stock market levels being high.
- Aware that returns on cash were unlikely to beat inflation.
- Other financial planning requirements are all met.
ETFs and structured products had been discussed, but each had drawbacks. Holding cash and dripping money into a managed portfolio was also being considered, but the administration thereof and holding cash were seen as disadvantages.
The PRISM solution
Invest immediately in a PRISM profile at the lower end of the risk spectrum, say Horizon 2 (H2). The H2 profile has defined mean of 3.75% in USD (3.0% in GBP) with a defined volatility of 2.2%. This satisfies the client’s requirement for a low cost solution, and seeks to address the concern of holding cash at the bank. Whilst the return of PRISM H2 is neither fixed nor guaranteed, the expected minimum 1 year return of this H2 profile is -0.6% in USD (-1.3% in GBP), with an expected maximum 1 year return of 8.1% in USD (7.3% in GBP). Return ranges are stated at a 95% confidence level.
Monies can then be switched over an agreed time frame depending on market conditions to a target allocation of 25% in Prism H5, 25% in Prism H6, 25% in Prism H8 and 25% in Prism H10. These profiles have an investment time horizon of 5, 6, 8 and 10 years respectively. The defined mean and volatility parameters of these profiles can be found here.
The benefit of switching gradually from H2 into the other strategies is that the client can average into higher risk-return profiles over time and avoid the ‘leap-of-faith’ move when there is concern about market levels, whilst still benefiting from an H2 investment profile in the interim. Of course, if there is a pullback in markets the client can take advantage of this and switch more aggressively at lower levels. Switching is easy and can be done regularly, on any weekly dealing date and free of charge. Once monies are fully invested in the target allocation, it allows the overall portfolio to target higher average returns over the long-term whilst accepting a higher level of short-term volatility to achieve those.
Having an allocation to different profiles allows separate amounts of portfolio value to be positioned to cover the possible different retirement dates indicated by the client. However, none of the profiles have fixed terms, so changes can be made at any time if required. Once a fixed retirement date becomes clearer, the allocations can be changed to reflect the actual draw down requirements and timescales. Again, realignment is done with no switching fees.
All of this activity requires monitoring and regular financial planning reviews between client and their IFA to ensure the portfolio in on track to achieve the goals set continues to meet the client’s changing objectives over time.
While there is never a perfect solution for all clients, this client scenario certainly resonated with the IFA who had requested this example, and I hope it provides readers with some ideas for how PRISM might be an appropriate solution to consider for certain client scenarios that present themselves.
For more information, full details, notes and risk warnings please visit the PRISM page on our website and download the literature.
So back to this year at the TT …
It has been wall to wall sunshine, a battle of two new beer tents, the RAF Red Arrows, Gary Barlow and Prince William (at different times!) and a new outright lap record of 16.53 minutes for the 37.3 mile course at an average speed of 134+mph! For me it was particularly hectic as I squeezed all my TT fun into the first week before I had to fly to South Africa on the Sunday after the first race.
Although I am missing the rest of race week in the Isle of Man, I am getting to see Boks play England in Joburg, so June is not all bad this year!