FC Investment Brochure

Simplified Approach to Investment Analysis

Choosing the right investments to meet your objectives is an essential element of Financial Planning but why is this important for you to know how we do this? We believe it is vital and as such we have produced this guide, which is designed to provide you with an understanding of our approach, principles and methodology. At the heart of our philosophy, and everything we do, is you, the client. How will we ensure you meet your goals? How can we make the journey as smooth as possible? How do we demonstrate progress in a simple, yet proven effective methodology? As a client centric, proactive and forward-thinking business, we always strive to go that extra step. We understand every client is unique, and there is no ‘one fits all’ solution. With this in mind, we have devised a robust process we believe caters for the growing needs of our customers and can assist in meeting their goals. 2 Simplified Approach to Investment Analysis

Investment Committee A key differentiator to many organisations of our size, is our highly experienced investment management capability, which is driven through our Investment Committee. A mixture of internal and external professionals, this committee meets on a monthly basis to oversee every aspect of investment management within Flying Colours, covering matters such as: • The Investment Philosophy • Defining the criteria for the investment funds within our offerings • Managing our Discretionary Model Portfolios • Market movements and events • Managing reputational risk • Commentary and outlook Key members of the investment committee Guy Myles Mark Preskett Garry Appleton CEO & Chief Investment Officer Independent Investment Adviser Head of Compliance Garry is a highly experienced Guy is the Chief Executive Officer Mark acts as investment adviser compliance and risk management and founder of the Flying Colours to Flying Colours regarding the professional with a proven track record Group of Companies. In addition Discretionary Managed Portfolios, at company director and executive to leading the business, Guy is also providing guidance on fund selection, management level. During 20 years the Chief Investment Officer, with asset allocation and portfolio in senior risk management and the responsibility for overseeing construction. compliance roles, Garry has operated on the research and design of the a ‘hands on’ basis being fully involved in Discretionary Model Portfolios. Mark is also a Portfolio Manager for the day-to-day activities of compliance, Morningstar Investment Management MLRO and risk management functions, In 2000, Guy was one of the founders in London, managing multi-asset as well as setting the strategic direction of Octopus Investments and helped portfolios for a range of financial in respect of regulatory compliance and grow the company from a start-up to institutions in the UK and Europe. driving good customer outcomes. the market leader with over 500 staff and £6bn of assets under management Flying Colours for more than 50,000 customers. Prior to that, he worked as a fund manager for Mercury Asset Management where he was responsible for over $1bn in US Equities. 3

1 Advisory Service Your financial planner will recommend a single, or multiple multi-asset fund solution, and will continue to monitor their performance and suitability on a quarterly basis. Any changes to the solution will require your consent, prior to making any changes. This service is generally run on a more reactive basis as part of annual review service. Our Services We provide two distinctive investment services, which are defined here. Discretionary Service Your financial planner will utilise a portfolio of funds, commonly known as a managed portfolio, which is managed on an ongoing basis by our Investment Committee. These managed portfolios are carefully constructed using a variety of asset classes which can 2include equities, bonds and money market instruments. 4 Simplified Approach to Investment Analysis

The combination of these asset Our Investment Philosophy classes will be dependent upon Our regulator, the Financial Conduct Authority (FCA) requires all regulated firms to only offer products and services that your risk profile, formulating are suitable for their target market clients. We have built our Investment Philosophy at the centre of what we do, influencing what is known in the industry as a our systems and other processes firmly around it. strategic asset allocation. We have identified three key fundamentals within our philosophy: This allocation is determined by the Investment Committee, as part of their Diversification Cost Strategic asset ongoing function. In general, the higher allocation to the risk, the greater exposure to equities, map to our something your planner will discuss at length risk profiler with you. Fundemental The Investment Committee can then make changes to the models without express Discipline in Tactical asset Passive consent and are run on a more proactive asset allocation allocation used investments basis. The risk-based model portfolios are and low trading rebalanced on a quarterly basis. primarily to favoured volumes mitigate Our Discretionary Manager Portfolio Service is aligned to our investment philosophy, economic cycle detailed opposite, and because it is managed by the Investment Committee, they have Secondary direct influence of how these portfolios are constructed and run. We believe this is the optimum solution for the majority of our clients, however, we understand that this is not for everyone, and this service may not be suitable for you. If this is the case, we have an additional offering to meet your requirements through our Advisory Service. Flying Colours 5

Diversification Strategic Asset Allocation American economist Harry Markowitz pioneered a Having already detailed the importance of theory in his paper “Portfolio Selection” if you select diversification, closely correlated to this is the Strategic a variety of different asset classes, investors could Asset Allocation. This is where we decide which maximise their returns within a defined acceptable level asset classes we invest in, the percentages and the of risk. This has become known as Modern Portfolio geographical split, for the most appropriate level of risk Theory (MPT). and expected return. Most investments are deemed to be high risk and high We place considerable emphasis on Strategic Asset return, or low risk and low return. Markowitz theory Allocation, stemming from Modern Portfolio Theory suggested investors could obtain greater returns by (MPT) a mathematical quantification of the benefits of selecting the optimal mix of higher and lower risked diversification. Whilst diversification and asset allocation assets, based on assessing the individual’s tolerance to go hand in hand, asset classes are not closely correlated risk. Put simply, diversification is essential. and work independently of each other. Each asset class behaves differently to economic A good example of how asset classes work differently events, so whilst it may sound bizarre, including a is during a recession. Equities traditionally fall in value, proportion of equities in addition to fixed interest whilst bonds often rise, therefore a portfolio that is within a risk averse portfolio, reduces the overall risk. diversified across the two would be less volatile than one solely invested in equities. Cost Maintaining Strategic Asset Allocation Because something is more expensive, does not mean it is better, a phrase many of us are familiar with. This is An asset allocation is set to meet your risk profile; no different for investment funds, and we believe cost therefore it is imperative the portfolio does not deviate is a very important and is a key criterion in our fund from these characteristics throughout the lifetime of selection process. your investments as the selected risk targeted portfolio is aligned to your risk profile and used to track whether Costs can be overlooked, as you may not be fully aware you are on track to achieve your objectives using of what is incurred. Every time an investment is bought cashflow modelling. or sold, costs can be associated such as dealing charges, bid/offer spread and stamp duty, which are not built into Maintaining stability in the asset allocation reduces the on-going charge figure. trading volume, costs and minimises errors. The portfolios we select or manage should have strong We aim to keep the turnover rate as low as possible, discipline around asset allocation, and not require large therefore reducing cost applied to the portfolio. Charges or wholesale changes over the time of your investment. can affect the performance, especially if trading within the portfolio is high and the returns are not reflected as a result. Flying Colours operate a very open structure and disclose all charges applied to our portfolios, to ensure you are not hit with any unsuspected costs. 6 Simplified Approach to Investment Analysis

Passive Investment Approach Firstly, let’s explain what the principle of passive investment is. Passive investing is a style of investment management where a funds’ performance aims to mirror a market index, such as the FTSE 100 or S&P 500. Passive management works in conjunction with Modern Portfolio Theory, removing the requirement for individual stock picking or tactical asset allocation. Utilising our experience within the industry, we believe it is difficult to search for undervalued stocks or try to predict trends through either fundamental or technical analysis, within most investment markets. Some fund managers are successful in operating in this way and is commonly known as active investment. Our Investment Philosophy focuses on Strategic Asset Allocation, based upon your level of risk. By adopting this approach, we minimise costs with the aim of generating better returns over the medium to long term. Advantages of Passive Investing Risks of Passive Investing • Costs Of course, there are risks associated to Passive Tend to have lower charges than their active Investing, which are monitored by the Investment counterparts Committee as part of their duties. • Performance • Differentiating Risk of underperformance versus the index should It can be difficult to tell if one index fund is better be limited than another, as they are required to mimic an index or benchmark • Due diligence Eliminates research and due diligence into active • Outperformance managers and their strategies Due to their management, it would be difficult to outperform an index or benchmark, especially in a • Transparency downward market, where an active manager can It is clear which assets are in an index fund adjust accordingly Flying Colours 7

Use of Tactical Asset Allocation Stocks Risk tolerance Goals Cash Asset Bonds Evaluating Your tailored classes your... portfolio Tax Time situation horizon Alternatives Plan for the unexpected Predominantly used by active managers, it allows the fund manager(s) to rebalance the portfolio by adjusting the percentages of assets held, to take advantage of short and intermediate market influences and events. The aim is to increase investment performance above the market average, but there is no guarantee this will work. The manager(s) of a Tactical Asset Allocated Portfolio, If the markets are significantly under or overvalued will increase assets in an area where they believe during our analysis, then it may be viable to adopt an outperformance will occur, therefore becoming active overlay within the portfolio. This effectively overweight. In this shift, they will become underweight means we will utilise elements of tactical asset in assets where they think they will underperform. allocation, for a short period of time, to maximise For example, if market indicators suggest Japan is these market events and increase performance. due to perform in the short term, but Europe is due to contract, the manager will shift more into Japanese Any changes to the asset allocation and the use of stocks and assets, reducing their European holdings. an active overlay, must be within a tightly controlled framework, to ensure the adjustments will not affect your risk profile and ultimately, right for you. We will revert to the Strategic Asset Allocation, as soon as we feel the market timings are right to do so. We limit the use of Tactical Asset Allocation and only when the overwhelming evidence suggests this should be utilised, will we adopt these methods. 8 Simplified Approach to Investment Analysis

Our Approach to Fund Selection Risk Profile Historically, financial advisers have researched and Before we recommend any Investment Portfolio, we recommended individual single asset funds, which must establish your Risk Profile. Every investment has an have been reviewed and selected, to create a suitable element of risk attached, irrespective of how cautious risk-adjusted portfolio, designed to meet the risk profile you may be. This is an unfortunate metric in investments. requirements of the client. With the ever-increasing offer of new fund groups and associated funds coming We establish your Risk Profile utilising the following to market, manager changes, adjustments to asset elements: allocation and performance, this became a cumbersome and difficult model to maintain. • Need Do you need to take any risk to achieve your financial We do not believe selecting individual single asset funds goals, within the specified time horizons? delivers a satisfactory or robust outcome for clients. For these reasons, we will not recommend or advise you to • Tolerance to loss invest in these funds, and we will not utilise portfolios How much risk are you comfortable with? How do you that do not have their own governance. feel about market fluctuations, potential for loss of capital etc? Our philosophy is you should benefit from fund management, from fund experts. In such a fast-paced • Capacity for loss market that is constantly moving, it is essential that your We utilise cashflow planning to assess your ability to investments can react to these movements, without absorb falls/losses in your Investment Portfolio, and seeking written permission. Our Discretionary Managed if this loss would have a detrimental effect on your Portfolio Service allows us to adopt this approach and standard of living. can react to time sensitive moves. • Knowledge, Experience & Sophistication If this service is not suitable for you, we provide an We will assess what your experiences have been with Advisory Investment Management Service, where investments in the past, and how you felt about these we may recommend well-governed, risk targeted experiences. multi asset funds, which meet your requirements and risk profile. This process ensures you and your adviser are clear on the level of risk you should be taking with regard to investing your money. Asset Allocation Each of the investments we look at has a: • Risk and return profile • Long-term asset allocation to match the risk and return profile The long-term asset allocation is continuously monitored to maintain the appropriate level of risk. This ensures your risk objectives are being met, and the recommended investments are consistent with your risk targets. Any investments that deviate from their risk mandates will be reviewed. If poor governance is identified, these maybe replaced with more suitable alternatives. Flying Colours 9

Our Screening Process The process is cyclical and is re-run on a quarterly basis. However, this can be more frequent if circumstances require, for example a market crash. 1 Initial screen to establish a 4 Factsheets are shortlist of funds. To get reviewed as a further this list, we mainly look at qualitative check. cost and performance. 2 This shortlist (typically 5 Funds are mapped to 400-700 funds) is then our own risk ratings, analysed in much more to align with client detail. outcomes. 3 Detailed look at historical 6 Funds are reviewed performance vs. volatility, by the Advice discipline, asset allocation, Committee and cost. approved or rejected. Summary At Flying Colours, we fundamentally believe high-quality financial planning advice and superior investment solutions are an excellent partnership, not reserved for the select few, but for every client. Flying Colours Investment Proposition is at the heart of everything we do and these solutions are designed to help you achieve your future goals and requirements. We understand the investment world can seem daunting and complicated. Your financial adviser is there to guide you through every step of the journey, to ensure it is as smooth as possible and you can face your financial future with confidence. 10 Simplified Approach to Investment Analysis

Glossary of Terms We appreciate that financial terminology can seem like jargon and a lot to take on board. Therefore, we have devised a simple reference guide for you, which will assist with the language used within this brochure. Active Fund Management Passive Fund Management The fund manager(s) will aim to outperform a particular This type of management looks to track a particular benchmark, by stock picking, or combining a number of index and therefore does not require the manager(s) complimentary funds that operate this strategy. Active to buy and sell on such a frequent basis as would be the managers analyse the market to identify investments case for active management. This type of investment that are deemed to be undervalued, whilst selling ones management is usually lower cost, by limiting the that are overvalued or may fall in the near future. This amount of trades performed. type of fund management is usually more expensive than its passive alternative, as the investment team are Risk Profile continuously analysing the markets and are trading more often, which incurs fees. This is an individual assessment of what level of investment risk that you are comfortable with and can Asset Allocation afford to take. Is the implementation of a strategy based upon your risk Strategic Asset Allocation profile. It details the percentage allocated to each asset class to maximise potential reward. Please see Strategic This type of asset allocation will invest in an array and Tactical Asset Allocation, for the definitions on how of different assets, which meet your risk profile and these differ. financial goals. This allocation will rarely fluctuate, as this could affect your risk level and tolerances you have set Asset Class with your adviser. These are the different areas in which your portfolio will Tactical Asset Allocation invest in. Most common asset classes are Cash/Money Market, Equities, Bonds/Fixed Interest, Property & The allocation will fluctuate dependent upon market Commodities. The mixture of the different asset classes movements and other external factors, the manager(s) will be based upon your risk profile and asset allocation. believe will enhance the performance. It will deviate over time, based upon the perception of the investment Capacity for Loss team and what their research indicates. This is your ability to absorb falls in your investment without having an impact on your standard of living. Flying Colours 11

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