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The First Wealth Investment Process

Posted by Anthony Villis, Managing Partner

At First Wealth, our advice broadly covers three main activities; lifestyle financial planning, behavioural insight and coaching and wealth management. The split between these disciplines varies according to each client’s needs and experience.

We’ve written several articles on lifestyle financial planning and behavioural finance recently, so it was interesting (and perhaps not surprising) that we had a number of requests for a more detailed overview on our approach to wealth management and the First Wealth investment style in our recent Client Survey.  

— Anthony Villis, Managing Partner 

Our overarching priority is that our clients havecomplete peace of mind that their investments are being managed in a secure, disciplined and professional manner using the best investment techniques available. Within First Wealth we also have a developed an in-house style focus on capital preservation.

When we set the business up, one of the key client offerings was an in-house portfolio management service that was specifically managed to run alongside our financial planning process. Aware that managing money is a full-time job in itself, we searched for an investment partner who could help us with the analysis, research and ongoing monitoring of the investment world, and help us build and deliver the First Wealth investment solution. After an extensive due diligence process, we decided to partner with Independent Strategic Research Ltd (ISR).

ISR is an award winning investment consultancy and strategic investment partner powered by a team of highly skilled investment professionals utilising cutting edge technology. They are independent and as such provides coverage across all major asset classes, investment strategies and instrument types.Their core business involves working with in-house investment teams and advisers to support the investment process, providing full market coverage, deep technical insight and portfolio and risk management solutions which seek to continuously evolve all aspects of our client investment program.

ISR’s approach to working with First Wealth allows cost effective delivery of institutional investment solutions whilst ensuring we have full control of the investment mandate and underlying assets.

Our partnership with ISR gives us complete confidence that there is a ‘twenty four seven’ culture of investment market coverage within First Wealth and allows us to concentrate on doing what we are best at – helping clients achieve their financial planning life goals.


The First Wealth Mandates

Our clients are hugely diverse in their life goals, investment experience, time horizon and attitudes to risk. Recognising this fact, in conjunction with ISR we have built three different styles of portfolios; Wealth Preservation, Accumulation and Income. Each style has seven different portfolios, defined by risk, giving a total of twenty one investment options. The specific solution used with each client will be based on a combination of factors as indicated above. We sometimes combine portfolios for the same client, for example, Wealth Preservation may be used as a shorter term savings plan, where Accumulation may be used for pension planning where a client has a long term investment outlook.

Wealth Preservation: the investment approach for Wealth Preservation models seeks to protect clients against the impact of inflation, by growing or protecting their capital. The portfolios look to blend assets that hedge inflation with other securities that offer consistency or provide long-term growth opportunities. The approach is dynamic in that it recognises that asset class characteristics vary over time such that, for instance, traditionally lower risk government bonds can become higher risk.

Accumulation: the aim of the Accumulation models is to grow the real value of capital over the long term. The portfolios use passive funds (index trackers) following a systematic process, blending long term growth assets with traditionally lower risk assets in order to match the risk profile of each client. The use of passive funds keeps the costs down, as we are consciously removing active fund management exposure within these portfolios.

Income: the Income models follow a similar approach to that of the Wealth Preservation models. The key difference is in the selection of higher yielding securities, which are blended in different proportions in varying risk graded profiles. A typical yield objective over the medium term will be three percent, but this does vary according to the securities used in the portfolio and the current state of capital markets.

Our Investment Philosophy

The First Wealth investment philosophy prescribes that successful investing is considered to be a dynamic balance between asset selection, strategy allocation and investment choice, applied using a tight risk management approach and with an adequate investment horizon.

We use a Core and Satellite approach to portfolio construction which will provide a robust framework to achieve the expected levels of risk/reward within each portfolio. The Core part of the portfolio is aimed to behave as a ‘stabiliser’ and will incorporate assets and strategies which aim to control risk and have the remit to dynamically adapt to the prevailing market conditions. The Satellite element of the portfolio is designed to selectively capture, in a more directional manner (direction in which financial markets are trending) the opportunities provided by markets and generate growth over longer time horizons.

Below we explain three of the key stages of the investment process in more detail - capital allocation, portfolio engineering and risk management. 


Capital allocation is the process of quantitatively analysing the condition set of over 30+ underlying assets with over 15 years of daily data. This is designed to identify the most desirable assets based on current market conditions and provide the optimal default allocation from which the portfolios should be constructed. The data used to drive this quantitative approach is based on technical market analysis, market sentiment analysis and a volatility module.

A large number of underlying indicators are analysed and scored for each of these three data sets, which in turn are combined and used to identify the required exposure to an asset given market conditions. This mathematical framework is specifically designed to remove behavioural biases from the capital allocation process. 


Portfolio engineering consists of two key factors; strategy selection and security choice. Strategy selection focuses on how we best extrapolate returns from an asset with the desired level of risk and exposure. Security choice is finding the most efficient balance between qualitative and quantitative features that will provide the consistency of return needed in the portfolio.

The risk management stage centres on selecting an appropriate blend of strategies and exposures to ensure the required level of diversification is achieved for each portfolio. Not all investment strategies will perform at the same time so spreading risk over a number of securities and asset classes leads to a higher level of portfolio consistency and efficiency.

Once the securities have been selected they enter the portfolio optimisation environment to ensure each portfolio meets the requirements of the specific First Wealth mandate. The optimisation process is based on maximising each portfolios risk/reward profile whilst minimising drawdowns by employing a model which captures the approved securities most recent shifts in correlation and volatility. This method of portfolio construction produces a mathematically quantified optimisation which removes human bias and ensures we are able to consistently evaluate a securities contribution to the overall portfolio over time. 

Rebalancing The Portfolio

Our investment process incorporates a rebalance policy as part of its dynamic approach to risk management. This means client portfolios will be rebalanced whenever circumstances are deemed appropriate to ensure the integrity of their portfolio is in line with their risk profile.

Rebalancing decision making is potentially generated at three levels. The below are examples of sensitivity at each level:

  • Capital allocation changes to portfolios arise when a shift in the capital allocation model indicates a more optimal capital allocation adding or removing an asset or theme from the range
  • Strategy changes arise when market conditions shift and favour a rotation into a different security set up to remove or add new factors or exposures
  • Risk management changes may arise due to a number of reasons such as; a breakdown in market conditions (increased systemic risk, illiquidity, counterparty risk, strategy behaviour), or a quantitative or qualitative failure at the security level.

A Word On Liquidity

One of the key question and indeed lessons from the financial crisis centred around liquidity: how quickly can I have my money back if I need it?

With the above in mind, high importance is placed on the analysis of liquidity at both the portfolio and security level. We require the securities incorporated and thus the portfolios themselves to have daily liquidity in normal market conditions. However, it should be noted that during stressful periods some of the underlying securities may not be able to offer this level of trading frequency and in order to minimise the potential for capital lock ups, a great deal of emphasis is put on liquidity during the security selection phase.

Our in-depth due diligence programme will highlight potential liquidity issues at both the security and operational level. For example, at the investment level the process will identify and analyse the impact of crowded trades (fund managers invested in similar or identical strategies), insufficient market liquidity, assets with bubble characteristics or exposure to factors with potential unknown or unquantifiable outcomes etc. At the operational level the focus includes consideration of the size of the portfolio and the ability to manage a portfolio of that size efficiently.

How much does it cost?

The costs of ISR’s research and ongoing support are settled directly by First Wealth.

First Wealth charge our clients an ‘all in’ fee of 1% per annum for the lifestyle financial planning, behavioural insight and coaching and wealth management services.

When looking at the total cost, we also need to consider the costs of the underlying assets the portfolio holds and any associated platform charge (the custodian of the assets). Our preferred trading platform is Fusion, which has an annual fee of 0.35% (reducing for investments in excess of £500,000). The blended cost of the underlying assets held in Wealth Preservation and Income (which blend active and passive funds) is circa 0.59% per annum (there is a very small variation based on risk profile), and Accumulation which is predominately a passive investment solution at 0.21%

So the all in cost of our Wealth Preservation and Income portfolios on Fusion are 1.94% and for Accumulation it is 1.56%.

Our market research tells us our fees are below the industry average, but we want to remain as competitive as possible, so we’re always looking for ways to reduce the cost of ownership for our clients. Our recent rebalance of the Wealth Preservation range has cut the costs of the underlying assets we use in the portfolio by 0.20% per annum, for example.

We will soon be reporting the total costs of ownership (in pounds and pence and percentages) for all of the investments we manage on behalf of our clients. The reporting will coincide with the Annual Forward Planning meeting. This new reporting will go live on 1 May, so please keep an eye out for this additional information.

(note: fees correct as at 25th April 2018).

How have the portfolios performed?

It is important to use appropriate benchmarks over the medium to long term to assess the efficiency and effectiveness of the mandates. The mandates require an unconstrained approach which is not governed by geographical or traditional benchmark or asset class constraints to enable the portfolios to remain dynamic in their approach to managing risk and return. For this reason the benchmarks selected below are comparators for the portfolios:

6 Month LIBOR plus a load according to the level of risk taken: This comparator is designed to provide perspective in relation to wealth preservation when reviewing performance over certain periods. It is the main benchmark by which we measure success. For example, Wealth Preservation 4 has a benchmark of LIBOR plus 4% each year and Wealth Preservation LIBOR plus 5%. The increasing benchmark return per portfolio reflects the additional return required given the level of risk taken. The hurdle rate shall be 6 months Libor plus a % loading for each portfolio. LIBOR (London Interbank Offer Rate) is a benchmark rate that some of the world's leading banks charge each other for short-term loans.

FTSE World Index: The FTSE World Index is a market-capitalisation weighted global equity index representing the performance of large and mid-cap stocks and covers 90-95% of the investable market capitalisation and covers both Developed and Emerging markets. The benchmark is used for comparative portfolios, as all of the portfolios are a blend of assets, depending on the level of risk adopted by each client. None of the First Wealth portfolio invest exclusively in equities.

The tables below show the annualised return since inception of the three First Wealth strategies; Wealth Preservation, Accumulation and Income. We have also included the benchmark returns for comparison and the level of volatility (standard deviation) demonstrated by each portfolio and their respective benchmarks (source: Independent Strategic Research, April 2018).

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I’m pleased to report that of the twenty one portfolios, eighteen have beaten their LIBOR Plus Cash benchmark since inception. Wealth Preservation 5 is 0.04% behind benchmark, with Wealth Preservation 0.01% and Wealth Preservation 6 0.29% behind respectively, as at end of April 2018. The level of volatility (standard deviation) meets expectations, and increases in line with risk profile, which is exactly what you would expect. Wealth Preservation 5 has demonstrated approximately one third of the volatility of the FTSE World Index, which is exactly as per the mandate to control risk. That said, market conditions have been favourable since the portfolios were launched, so we remain vigilant to global macro-economic trends, and there is no room for complacency.

The return received may rise or fall as a result of currency fluctuations.

Past performance is not a reliable indicator of future results, prices of shares, and the income from them may fall as well as rise and investors may not get back the amount originally invested.

This article does not constitute advice. Anyone considering any form of financial planning should seek independent financial advice. First Wealth LLP is an appointed representative of Best Practice which is authorised and regulated by the Financial Conduct Authority (FCA). You should note that the FCA does not regulate tax advice. www.firstwealth.co.uk.

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This article does not constitute advice. Anyone considering any form of financial planning should seek independent financial advice. First Wealth LLP is an appointed representative of Best Practice which is authorised and regulated by the Financial Conduct Authority (FCA). You should note that the FCA does not regulate tax advice.

Past performance is not indicative of future results. The value of your investment may go down as well as up.

Posted by Anthony Villis, Managing Partner

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