Investing Is Simple… But Not Easy with James Baker of Albion Strategic Consulting

In this episode, Jonathan Gibson speaks with James Baker about the realities of long-term investing and the philosophy behind systematic portfolio management.

James shares insights from working with over 75 financial planning firms and explains why evidence-based investing continues to outperform emotional, prediction-driven decision making over time.

The conversation covers:

•  The origins and philosophy of Albion Strategic Consulting
•  Systematic vs active (judgmental) investing 
•  Why markets are difficult to consistently outperform 
•  The importance of diversification and risk management 
•  The role of small companies, value investing, and profitability factors 
•  Why investor behaviour is often the biggest risk 
•  The importance of sticking to a long-term financial plan 

This episode is ideal for investors, financial planners, and anyone seeking a calmer, evidence-led approach to building wealth.

“Investing is simple, but not easy.”

“Diversification is your best friend in investing.”

“You haven’t lost anything until you sell.”

“Markets work pretty well — and that makes them incredibly difficult to outguess.”

“The best firms focus on the evidence and put clients at the centre of every decision.”

“Stick to the plan. Tune out the noise.”

“Time in the market matters more than timing the market.”

“Capitalism creates wealth — investing is simply participating in that growth.”

RISK WARNING

“Albion is not authorised by the Financial Conduct Authority to provide advice or to make arrangements in investments, or to carry out any other regulated activity. The views shared in this recording reflect general observations only and should not be interpreted as guidance for end investors or financial advice in any capacity. Any investment decisions should be made solely in consultation with a qualified and regulated financial adviser.”

Find all our useful links on our LinkTree - https://linktr.ee/jonathangibson

And why not visit us at: https://www.wellsgibson.uk/

And get a copy of the book, Purposeful Wealth here: https://amzn.eu/d/0i7wWgJy

Transcript

SPEAKER_00 0:07

Welcome to the Purpose for Wealth podcast brought to you by Wells Gibson, where we talk honestly about investing, financial planning, and what it really means to build long-term wealth. I'm delighted to have a very special guest with me today, someone whose thinking sits at the very heart of how we at Wells Gibson approach investing. James Baker is a director at Albion Strategic Consulting, a firm that works with some of the most thoughtful, client-focused financial planning firms in the UK. Albion supports firms like Wells Gibson with our investment philosophy, portfolio construction, due diligence, and the kind of rigorous evidence-based thinking that keeps us honest and keeps our clients on track. James and I work closely together, and I can tell you, conversations with James, they do have a habit of clarifying things. He has a rare ability to cut through the noise and to get what actually matters when it comes to investing. So, James, it's great to have you with us. A warm welcome to you.

SPEAKER_01 1:23

Thanks very much, Jonathan. Wow, that was uh quite the introduction. That's there's a lot to live up to, so I'll do my best.

SPEAKER_00 1:30

I'm sure you will. James, listen, for you know, for you know, for listeners or viewers who um might not be familiar with Albion, you know, how would you describe what you do in simple terms?

SPEAKER_01 1:46

Good question, Jonathan. And it's one that I have worked on for 10 years because I'm sure no matter how many times I tell my parents, my wife, what I do, I'm not sure they're not sure they ever fully get it. But um, so Albion is what you traditionally call an investment consultancy firm. We like to think of ourselves as much more than that. We are, you know, an investment research house. We're really passionate about investing. And uh we've been in the UK now for around 25 years. Um, my uh good friend and team member Tim Tim Hale founded us around 25 years ago. We were very fortunate to fall into the what we call systematic side of the industry, and I'm sure we'll talk about that in a little bit. But Tim set us up 25 years ago because there was this real lack of kind of investment rigor and investment science happening in the UK. And it wasn't necessarily anyone's fault, it was just that um we hadn't quite got there yet. We were probably 10-15 years behind the states where Tim was working before. And Tim really came back to the UK to be with his partner and and start raising a family and and went out to the working world to try and help support advisors and was sort of like, wow, we're we're kind of a little bit behind here. We're we're you know, we're kind of a bit old school, we're picking funds based on, you know, commission or you know, beauty parades, the next best trend of the day, and and there's not a lot of rigor and science going on in the background. And and he had been used to that in in the States um with his previous jobs. So he set up Albion to partner with financial advisory firms like Wells Gibson and and others to really bring that rigor and and science and process uh into their investment proposition and and really start focusing on you know what is going to give our clients the best chance of success. Um so that that's what we started as, and that's what we do today. We partner with 75 or so firms, mostly in the UK, but a handful abroad as well, um, to bring the definition of their proposition, uh help them govern it, help them govern it through time, and help them communicate it to their own clients, uh, much like you're doing right now.

SPEAKER_00 4:11

Yeah, okay. You said 75 firms, so that seems a heck of a lot. I mean, what what sort of value of if you were to add up or total the value of the assets or or you know money invested in pensions and investments, for instance? You know, what what sort of value are you looking at there, James?

SPEAKER_01 4:30

Yeah, it's a great question. I mean, we do an annual survey for clients um where we ask what their current AUM is. Um we haven't done that for a couple of years now, um, but the last estimate was about 25 billion. Um so that was two years ago. So with the firms that have joined in the last couple of years and some pretty favorable markets in the last couple of years, I would guess 30 to 35, probably.

SPEAKER_00 4:59

Goodness, yeah, yeah, quite incredible. Huge responsibility, isn't it? Huge responsibility.

SPEAKER_01 5:04

It is, it is, and and when we when we get to those numbers through from the survey, we really do, you know, it's a it's a kind of pinch-your arm moment of like, wow, I mean, this is a huge responsibility, and we take it very seriously.

SPEAKER_00 5:16

Yeah, and for for our viewers and and uh listeners, James just mentioned uh uh three-letter abbreviation called AUM there, and that means assets under management. And uh in our sector, we sometimes you hear assets under management or funds under advice or funds under management. It seems to be um um so many terms used for for the same thing, really. Um most of these firms, James, you're working with, they they share a strong financial planning ethos. I mean, what do you find that these firms typically have in common? Really good question, Jonathan.

SPEAKER_01 5:51

And and crucially, financial planning focus is is a great place to start. Um investing is just one part of the financial planning process, as you well know. Um, it's an absolutely crucial part, like none of the rest of it works without the engine. So you've got to make sure the engine is fit for purpose and you can almost think of it as like a car. Um, but you know, none of the rest of the car can function without the engine. But, you know, it's not like the driver has to go in and be able to explain exactly how the transmission works, about how the you know, fuel injection works and all that good stuff. You need to know it's reliable and works and it's going to be there for you through time. But you know, it's not the be-all and end all. And financial planning focus is is absolutely key, like robust cash flow planning, um, really focusing on those end client outcomes. Um and and I think a big, a big difference between you know, not just Albion clients, but but firms that really are in that systematic space versus um perhaps on the more judgmental side of the industry, which is really catered to to different types of of clients, but your focus is on best chance of success. And that is is really subtly different from um you know largest amount of success in the smallest amount of time because they're very different things. Um, you know, if I were to build a portfolio to beat everyone in the next year, it would look extremely different from a portfolio that that we build with our clients at Albion, because that's not what we're trying to do. We're trying to to match those those client client liabilities through retirement and make sure they're comfortable, happy, and can do what they want um throughout the rest of their lives.

unknown 7:42

Yeah.

SPEAKER_01 7:43

And that's that's the focus of our clients.

SPEAKER_00 7:45

Yeah, and it seems to be uh certainly from my awareness of other firms who I know use you use uh you know your own services, that um they're very much putting the client's life at the very centre of their conversations with them, the the the client's life very much at the centre of the planning, and it just happens to be that what's powering their plan and their financial future is a a sensible approach to investing. And it seems to be the the if you like that sort of common denominator. And I mean I've often I I mean I regularly say to clients that we we we we wear a risk manager's hat as opposed to a performance manager's hat, and uh and and yet by wearing a risk manager's hat our performance is is is is nothing to be ashamed about. You know, it's it's um leading the way in many in so many ways. And uh but what would you say differentiates firms who truly believe in systematic investing from those who advocate an active or judgmental approach to investing?

SPEAKER_01 8:56

Yeah, so risk managers hat on. That's one of the things we actually start with throughout our induction process, our induction process with new clients at Albion. And it's a really key starting point for understanding what a systematic approach to investing is. And um, a systematic investment manager essentially looks at market prices today and says, what does it tell me about the expected return in the future? What does it tell me about the risk embedded in that price today? Uh, about the future. We're not really interested in the past. The past is important and it obviously feeds into uh decisions and data and number crunching and whatnot. But ultimately the past is the past. The future's really uh what we ought to be building our portfolios for, and that's that's a systematic approach to investing. We say, what does what does the current market price tell us about the future? A judgmental approach, on the other hand, is different to that. It says, I've got some assumptions about these companies or this manager or this region or this geography, this sector. I've got some assumptions, and I think they're going to do X next year or Y in five years' time, and I think they're going to be better than this sector or this company or this um or this uh region. And they'll make up their own assumptions and and then almost compare it to the market price and say, well, I disagree with the market price. I'm gonna go and do this because my model, my um extra um skill set disagrees with the market price. And so I'm gonna go and do that. Um and the challenge you have over on the judgmental side is you've got millions of extremely intelligent, highly qualified, highly paid individuals doing exactly the same thing as you are, and they're all trying to outcompete each other and come up with better assumptions, better models, better machine learning, better AI, whatever it might be, to feed into their forecast for the future. And the beauty of a systematic approach is you get to benefit from the equilibrium, the midpoint, all of those different models, some of them will say buy this, some of them will say sell that, and and ultimately we'll arrive in this middle point, which is the current market price. And you as a systematic investor, you just say, listen, I'm gonna, I'm not gonna, I'm not gonna do that. I'm not a professional like stock picker, or I don't have these really sophisticated models. I'm gonna, I'm gonna piggyback and benefit from the aggregate view of of all others in the industry. And and it sounds like that actually sounds like quite lazy or whatever, there's still a huge amount that goes into systematic investing. It's not as simple as just you know buy one thing and forget about it. Um, far from it. But ultimately you've got this really efficient thing driving your outcome, and that's human ingenuity, it's capitalism, and as long as that survives and thrives throughout the the rest of your life, you're gonna be in a pretty good place.

SPEAKER_00 12:07

Yeah, yeah, yeah, totally agree. And I think that was very much um I think that was very much my the starting point to systematic investing um was that sense that actually it's um you know capitalism, it's capitalism that creates wealth, and you and I know capitalism isn't perfect, it's it does have its challenges, um, but it's probably the best of other economic models. Um but it is capitalism that creates wealth, that um the markets themselves do a pretty good job of giving investors a return over time, and that volatility and return are related, and and really the only free lunch that we have when it comes to investing is diversification, let's not having all of our eggs in one basket. Um I suppose my question to you, James, is why is it so important that um that an investment process begins with clearly defined beliefs like the ones I've just mentioned there?

SPEAKER_01 13:12

Yeah, well, if you don't have beliefs as part of your investment philosophy, as part of your uh construction process, then you've really got nothing to anchor to, nothing to measure yourself against through time. And I think that's where even the systematic space does fall down um in the industry, and that's where you know Albion really pride ourselves on being some of the deep thinkers and um whatnot in this space is that you know, based on what I've just said there around systematic and judgmental, a lot of people think oh, you can just go out there and pick, you know, the cheapest index fund um from you know Vanguard or a LNG or whoever it might be, a fidelity, and you know, maybe pick a bond fund or hold some cash alongside it if you need to, and you know, rub your hands together, job done. Um it it just is is so there's so much more to it than that. Uh like I can't begin to describe how like that you know, that is it's gonna give you a pretty good outcome, that but there is so much more to it than that. Um, you know, so it's um it's about what are we trying to achieve for our clients? Um, what are the beliefs that we hold based on the evidence, crucially, that will um allow us to achieve that goal. And how do we measure the portfolio through time to make sure we're we're achieving those goals uh and constraints and are in line with the beliefs um uh that that are underpinning the portfolio. So if you don't have beliefs, the real danger is you get lost through time. Um, you know, you get lost picking uh another low-cost fund just because someone uh you know shaved a basis point off, and you know, you save your clients uh one basis point, but you know, all of the trading and time out of the market you do to get there costs them 30, 40 basis points. Or you you know, you go to uh an industry conference and someone talks about something really exciting and compelling. And you know, because you don't have really clearly defined beliefs and and goals, you you end up making wholesale changes to to your client's portfolio just for the sake of it. So you you have to have beliefs that they're really are they're the starting point of of a proposition.

SPEAKER_00 15:38

Yeah, yeah. And and you know, starting with that aspect, you know, starting with the this idea that it's capitalism that creates wealth. I mean, James, what are we actually what are we actually buying when we invest?

SPEAKER_01 15:52

It's a great question. And I'll probably I'll stop saying it's a great question after every question, but but this is a great question. Um I hope they're great questions. Yeah, yeah. Well it is a great question, and because people don't often think about that. They'll they might buy a fund or a a selection of funds and really not think deeply about what's going on under the bonnet. Um and and I think it's part of the the challenge you face now with with sort of so many product providers out there is that you know end clients almost want to see lots of line items on their on their kind of platform or on their fact sheet because it makes them feel like they've got all of this good stuff. The reality is funds, open-ended funds, the ones that our clients would be mainly using in their portfolios are combinations of stocks on the equity side or bonds on the fixed income side, or a mixture of the two, if you're talking about, say, a multi-asset fund. Um now, obviously, there are more investment opportunities out there, um, hedge funds, private equity, structured products, digital assets, etc. etc. But focus on the big two traditional assets. When you buy uh an equity fund, you are buying a small share in each one of the companies listed throughout the world. I'm talking specifically here about index funds, um, not about um not about the active side. I mean, it's sort of the same principles, but you're buying a smaller subset of um the overall marketplace if you go down the active route. But if you buy a broad market equity fund, you're buying a small share in the future earnings of Apple, of Nvidia, of Amazon, of Tesla, of Microsoft, you know, all the way down to your mid-sized companies, your small companies, and your micro companies, most of which we probably won't heard of, but you buy a small slice in each of them. Um the proportion that you buy is equivalent to how big those firms are in the marketplace. So you're gonna own more of Nvidia, Apple, Microsoft, Amazon than you are of you know, uh some of the smaller firms uh out there. You know, UK, for example, we're a smaller market, Exxon, BP, you're gonna have a smaller proportion of those firms than you are of the bigger companies. But but that's it, essentially, on the equity side, you buy a small share in each of the companies, and that gives you the right as an owner to participate in the future earnings of that company. It gives you the right to enjoy um you know the growth and the uh the future earnings of that company through time. Um on the bond side, you're effectively, if you buy a bond, you're effectively lending to either a government or a corporation. Um you're effectively buying debt. So in essence, you're lending, you're lending rather than rather than buying. Uh, and in return for buying those bonds, in return for uh lending your money, parting with your capital, you get um promised uh an interest rate, uh, an annual interest rate, and then your principal, the amount that you lent at the start, is returned to you at the end as well. Um if you if if you buy a bond and hold it to maturity. Um in a bond fund it's slightly different, you're not holding to maturity, but effectively you're lending to companies and corporations, or you're buying a small share in in each one of the global companies listed around the world.

SPEAKER_00 19:34

Yeah, yeah. I mean, I think we regularly try to um, you know, with you know, certainly with meeting, you know, with meeting our clients, we'll we'll regularly say to try to think of their portfolio as that that if you like as the great companies of the world that are producing real goods and real services to real people at the end of the day, and and their pensions and their ISIS or other investments are simply just that gateway, if you like, into owning a little bit of these great companies of the world, and that over time if we believe that um great companies will continue to exist, that uh we can share in the share in their fortunes. So um I I suppose one of the one of the challenges you and I know that volatility is a characteristic of markets, and we would you and I would also know we'd agree that volatility is the in many ways is the admission price, you know, if you want the returns, um but actually let me go back one. I'll go back one. When we say that markets work reasonably well, I mean what does that imply about trying to out guess them?

SPEAKER_01 20:51

Markets working well is it's quite an sort of um abstract point to get your head around. It's like what does it mean that a market works well? And this is uh if you've not heard of Eugene Fama listeners, I can uh and you're interested in investing, you should definitely go look him, look him up. Eugene Fama is a Nobel Prize winner, he is known as the father of modern finance. Um, he's done all sorts of amazing work in the investment space, but one of his kind of key um hypotheses, if you like, is called the efficient market hypothesis. And what it essentially says is that market prices effectively reflect all known information. They have all known information embedded in my uh is embedded in market prices. Um that is uh it's an impossibly you can't you can't prove or disprove that statement. It's it's not it's you know it's not a scientific statement, if you like. It's impossible to to prove that with certainty. But what you can do is try and uh Observe some things that you would expect if market prices effectively reflect all known information. And what we can try and do is think about what that actually means. So if a if a stock price reflected all known information, then the only reason that that stock price should move in the future ought to be the release of new information, new unknown information. And that that is a by definition random process. And through time, you know, we have we have market events that happen all the time, whether it's earnings announcements about a company, whether it's um you know a global superpower in deciding to invade um a small comp a small country in the Middle East, whether it's a pandemic, whether it's um you know uh whatever it might be, tariffs, that there's all sorts of new information being priced in all the time um to market prices. And market efficiency just says that um everything we know now is already embedded in the current market price. And therefore, one thing you'd expect to see if that were true, or or at least a reasonable approximation of the truth, is that it's very, very difficult to profit from second guessing market prices. Like it's very, very difficult because you're effectively betting against a random process. It's much more akin to going to the casino rather than you know um rather than what what people think it is, which is which is investing through time and expecting to beat the market. Um hopefully that gives you an idea.

SPEAKER_00 23:39

Yeah, and you said that earlier, didn't you? That the that there's so many participants in the market that's really ultimately deciding the prospects or the you know how well a company or is good you know or a share is going to perform. So um, you know, to try and undermine that seems to be futility, really.

SPEAKER_01 24:01

Yeah, and and exactly, and one one thing that I think investors struggle with sometimes is um that market efficiency doesn't mean that the prices are perfect. It doesn't mean that they're they're absolutely bang on to what the true you know unobservable intrinsic value of of each company is. It just means the errors, the errors, whether it's slightly high or slightly low, are by definition random. And and if they're random, you know, if this price is slightly too high, if this one's slightly too low, if this one's way too high, if that if those errors are random, you know, it's incredibly difficult to profit from them. So it it's market efficiency is is quite abstract. It's not we can't prove it with certainty, but one thing we would expect to see if market efficiency was broadly true was that it'd be very, very difficult to beat markets successfully, consistently through time, and that is observed um, you know, wherever you look. Wherever you look, um, as long as you benchmarked um, you know, that cohort of active managers properly, on average they do they do pretty poorly um before and after costs.

SPEAKER_00 25:09

Um over time.

SPEAKER_01 25:12

Exactly, yeah, over time. In the short term, maybe you're gonna have some that that sit in the right side of the distribution because they happen to be in the right place at the right time. But if you're looking over any meaningful time period, 10 years, 15 years, 20 years, um, you know, there's there's nowhere to escape. Markets just do what markets do.

SPEAKER_00 25:32

Yeah, and it seems it seems to be that those managers that are trying to you know to beat the market or beat their benchmarks and are taking that judgmental or active approach to buying and selling shares in the great companies of the world, it seems to me that those those that that the studies seem to reveal very clearly that those that have a period of outperformance, it tends to be short term, you know, it might be a couple of years, it might be three years. Um and but yet that outperformance doesn't follow in the following three years, if you like, you know, like they fall off a cliff. And which just which goes to show that it probably was just that the outperformance was probably just down to luck, perhaps, and not skill. Yeah, they would like to see it.

SPEAKER_01 26:19

Exactly. Yeah, I mean it's it's obviously not, you know, certainly don't want to um you know sit here and and really bash the other side of the industry and say, you know, it can't be done. Um it certainly can. You know, the likes of of Warren Buffett, of um Jim Simmons, of uh Peter Lynch, you know, we know the names, and that's the crucial point. We know who they are because they're one in a million, they're one in a hundred thousand, and you know, by the time they've done what they've done, it's often too late for the mass for the vast majority of of investors. And you know, for every Warren Buffett, there's hundreds of thousands of people we don't know because they couldn't do it. So, you know, as I said, what's happened has happened. What's important is what's going to happen in in the next 20 years. And um, you know, you need you need many, many years of consistent outperformance to be mathematically sure that what you're looking at is skill and not luck. Um, you know, someone like Warren Buffett probably passed that test. Uh uh a Kathy Wood, for example, again, not to not to say that she's not uh you know really intelligent and and great at what she does, but you know, that those sort of few short years where she absolutely hammered the market, it could be that she's highly skilled, but it could also be that she was just lucky and she was in the right place at the right time. You need that, you need sort of 20 odd years and beyond, really, to be to be mathematically sure that what you're looking at is skill and not and not good fortune.

SPEAKER_00 27:54

And I suppose the the the other aspect with all of that is that um, you know, to the to the consumer who you know looks at Best Buy tables and the Sunday papers or whatever, and they see the top the top funds, what they're not maybe seeing, of course, is the you know what what level of risk has been taken by that manager to achieve that return. And and it could well be that actually the the that specific fund manager has just called it lucky with small companies or value companies at a at a period of time and they've managed to get that outperformance. Um so you know, risk-adjusted returns would surely have to be a big part of that, wouldn't it? If there is has been a bit of outperformance.

SPEAKER_01 28:37

Definitely. And that's one thing that we have learnt in the systematic space through through the decades is you know, just because we think markets are pretty efficient and therefore difficult to beat, doesn't mean we don't have choices as an investor. Um if markets are pretty efficient, you know, then all known information is is is already captured in the market price. But that doesn't mean that every stock is made equal or every bond is made equal. There are the the evidence through time has evolved, you know, and and as I said, Gene Fammer earlier, there's Ken Frentz, there's Robert Novi Marks, uh, and many, many others, Will sh uh Bill Sharps, uh original Cap N. There's there's there's many, many others in the academia that have consistently looked at asset pricing models through time, and they've essentially come up with frameworks that say, well, look, the market's pretty efficient, but that doesn't mean that different groups of stocks don't behave differently. And what you've uh settled on there, Jonathan, is is size and value. Smaller companies and relatively cheap companies tend to behave differently to their counterparts, the large companies and the more expensive companies. Same with with profitability, higher, more profitable companies behave differently to those that are less highly profitable. So that's us effectively doing that process I said right at the start, which is it's using the market price to say, what do we expect tomorrow, rather than saying, what do I think um, you know, what do I think is going to happen tomorrow, and then comparing it to the market price and effectively disagreeing.

SPEAKER_00 30:14

Yeah, yeah. And and I and I was I touched on this earlier that um, you know, that term risk and return are related, I prefer to refer to that as volatility and return are related. In other words, if if as an investor we're wanting higher expected returns from our portfolio, which is made up of pensions and ISES and so forth. Um, if we want that, those higher expected returns, then we have to accept that with that comes higher volatility. Um what's important from your perspective, what's important to understand about this, James?

SPEAKER_01 30:53

So volatility is, and I think you're absolutely right to call it volatility, not risk. It traditionally was used interchangeably with risk. Um, but volatility is a risk in investing. It's the one most people anchor to. Volatility effectively captures how how much your portfolio is kind of going up and down through time. Um, a good rule of thumb volatility if you've got a volatility of 10% and say an expected return of, I don't know, five percent, then two in three years your return's going to be five plus or minus 10. And then in that third year, you're gonna be outside of that region. So that's kind of the rule of thumb. So you can imagine straight away if you've got a volatility of 20, and two in three years are gonna be five plus or minus twenty, that you're you know, you're wiggling about much more than than than the sort of 10 example at the start. So volatility is a risk and it's a key risk. But what you're essentially trying to do uh when you build a portfolio, or at least when you when you think about building a systematic portfolio, is you know, one of the things you can do is maximize your volatility adjusted return. Um so you said right at the start, Jonathan, that diversification is your only free lunch in investing. And that is absolutely true. If you can find asset classes, if you can find groups of stocks or um investment opportunities that have um a positive expected return, that you have good data for, that you have an economic reason for why there's an expected return there, there's robust products. Um, if you can meet all of those hurdles and then putting them in a portfolio alongside whatever else you've already got in that portfolio gives you a diversification benefit, i.e., some are going up while some are going down, and then they kind of keep crisscrossing with one another. What you're effectively doing as the investor who owns both of those asset classes is you're enjoying a much smoother ride between, you know, in the in the middle. Um you've got you know all different uh investment opportunities zigging and zagging, and you're you're enjoying a much smoother ride down down the middle of that. Um and that'll be what your portfolio looks like. Um there's a key benefit to what I said earlier that the risk factors that the likes of value and profitability and small caps, they are one stocks with higher expected returns, but almost more importantly, they are areas where you can diversify and improve that volatility adjusted return. You can earn either a similar amount of return for lower volatility, or you can earn um higher expected returns um without materially raising your volatility. So that that's um that's where we're going with uh some of the construction approach, uh some of the elements of the construction process that that we look at with our clients.

SPEAKER_00 33:54

Yeah, yeah. And I think it was uh a wise man once said when it comes to investing, three things matter diversify, diversify, diversify. I'm I'm I'm I'm sure. But um it you know, once once you've accepted those four beliefs that you know that capitalism creates you know wealth and that markets do a pretty good job of giving us a return over time, and that volatility and return are related, and that diversification is that um free lunch when it comes to investing. Um there are I think it's important that we maybe talk a wee bit about what we mean by that, because it doesn't mean that you invest in everything that's available, you know, that's available. Um I mean I think at the last in our last investment committee meeting um or looking at the investment process, um you know, we we there's about 21, 22 different asset classes available to invest in. And I and then it's exactly the same way as making a cake, you've got to start with the right ingredients. Um you know, we need to know the right ingredients. And I suppose, you know, out of the 21 asset classes that seem to be available to an investor, um, you have your what we call our defensive assets, which we tend to think of as fixed interest or bonds, um, which are loans to governments, loans to corporations, and then we think of growth assets, which we probably think of as shares or equities in the great companies of the world, including developed market equities, emerging market equities, and and small companies and you know, lower price value companies and so forth. Um, and then on the there's all these alternative assets which include crypto or um private equity hedge funds and so forth. Uh what from Albane's perspective, what's the criteria, James? What I mean, what's the what's the important criteria that we need to be thinking about before and this is really for our viewers and listeners, what's the important criteria for an investor to be thinking about before they include an asset in a portfolio?

SPEAKER_01 36:08

Yeah, it's really there's there's there's many elements at play uh uh essentially, and I touched on some of them earlier, but we have a a pretty rigorous framework for asset classes to meet that hurdle of warranting a place in the portfolio. And um it that's Albion's view. It's not prescriptive. Uh we we give it as a sort of starting point for all of our clients, and that's the part of the induction process is for our clients to kind of make their own mind up on these things. We we have our view and we present the latest and greatest evidence, and then you know our clients kind of choose to go one way or another, and we help them make that decision. Um so we have uh six six criteria within our asset class analysis that we update each year. There needs to be an economic rationale for where the return comes from. There needs to be adequate data insight, and adequate data insight is not five years, ten years, it's decades, if not centuries. Um there needs to be robust products available to us. There needs to be um uh there needs to be a place in the portfolio for it. So we need a role in the portfolio, and that's a really key one. We have to be able to, you know, we've got to ultimately come up with a portfolio and to to put something in, you have to, by definition, take something out. So, you know, that's and that's always a key thing that's missed here is if we want to add more in value stocks or in real estate, say, well, that has to come from somewhere. So what are we dialing down to get from A to B? And that's that's something that investors miss all the time. Um you know, you've got to take something out to put something in. And then there needs to be uh the risk management process, the ongoing risk management process needs to be um doable. Um, and that that's another one as well, which is uh often forgotten. So something like uh, you know, the hedge fund universe, say there's there might be elements of um, you know, things like um trend following strategies or managed futures. I won't go into what they are, but there might be elements of the hedge fund world that have sort of got some quite compelling evidence behind them. But the problem is the risk management process involves spending hundreds and hundreds and hundreds of hours to satisfy yourself that this is the one. And even then you can't be, you know, sure. You can't be sure that the manager you've selected is the right one. You know, you're gonna spend all your time on that process rather than focusing on the really important things that's like the financial planning side of your client's business. So the risk management needs to be manageable, and then finally there needs to be robust, robust products available to us. So um something like profitability that I mentioned or short-dated inflation linked bonds, say those are two asset classes where we really we really struggled for product in the past and and and innovations from uh the likes of dimensional, of Avantis, of iShares, um uh Vanguard and others have have opened up asset classes through time because they've they've ultimately launched products in in different spaces. So um so that's the criteria, and and we update the research for all of the asset classes that our clients effectively know about each year, and it's um it's a really fun part of what we do. I I would probably say most people will hear that and be like, sorry, what? That's fun. Um but we we love it. Um we absolutely love it. So um, so yeah, hopefully that's useful.

SPEAKER_00 39:45

Very useful. And I think you're you you know that this this point, uh I suppose like making a cake, and you've decided on right here are the ingredients we want to use to make this cake, um that then there's a question about how much of each ingredient do we need to make this cake, or how much of an asset class do we need in this portfolio? And and are there are there ingredients that we could include, but we're not sure whether to include? You know, it's an important one. I suppose how how do you, you know, from Albion's perspective, um, I mean, how you know how do you decide um you know what not to include, you know, even from your perspective, James? You know, what what are the sort of red flags for you? You know, you talked about the six criteria, economic rationale. Is there is there one of those six criteria which is just the big no-no? If it doesn't have that, it ain't going in.

SPEAKER_01 40:41

Yeah, it's good good question, and and it's an interesting one because this is where this is where it's not black and white, right? Because I said at the start, there's sort of these broadly, there's these two camps, systematic and judgmental. Sometimes that's referred to as you know passive and active or index and active. And the reality is it's it's shades of grey, and and we can you know science the investment side, we can we can number crunch till we're blue in the face, but we've got to make some decisions at some point, and and ultimately it's gonna get to the point where those decisions are driven by preferences. So interestingly, you know, me, my colleague Ben, Dan, Tim, you know, we've been at this for Tim 25 or 30 odd years now. Uh, me and Ben and Dan for a decade or or more now, and and our portfolios all look slightly different. They are all they've all got the same ingredients, as you say, but I might have more of one ingredient than than the other. And and you know, Dan might have uh gone down a different route and chosen a different fund. Ben might have done something else, and and they're they're driven by preferences at the end of the day within a very rigorous and robust framework. Um, ultimately the question is always what mix of risks do you want? That's the key. It's risk. We've got our risk hats on at all times. It's what mix of risks do you want? What mix of risks are right for you, the investor, to make you feel comfortable and meet your financial goals through throughout your life. That's that's the absolute key. So um, so what um and you mentioned you know which criteria are sort of absolute for me. Um, you know, I would I would I'd like to say them all um because they are all um really important, but um economic rationale I think is a huge one. I think there's lots of asset classes out there that have got exceptional returns through time. Um, you know, there are there are 30-year periods say that you can look at gold and it looks fantastic. Um same with say long duration bonds, same with uh crypto cryptocurrency, I guess back to 2009 now with with Bitcoin, you know, you can look at the returns and and create uh create an economic rationale around it. But I think if you start from first principles, something like gold, something like Bitcoin, um just as an example of those with good returns, falls down quite quickly. So economic rationale is is huge for me. Um I think it's where it where it should start. Um but there's there's obviously the others are all important as well.

SPEAKER_00 43:21

Yeah, and and it is you're you're absolutely right, because even on the defensive side of things, you know, there could be a temptation. Um, you know, you you think of emerging market debt, you know, emerging market bonds, and and we know you know, we know that um we just need to look back at during the COVID period or the financial crisis or you know, the tech bubble at the start of the start of the millennium to see that some of these asset classes start to behave more like equities during these these periods. And it's these are the sort of decisions that um need to be considered, don't they?

SPEAKER_01 44:00

Definitely. It's really I think people get to things like emerging market bonds and high yield bonds, and I think they think about them in they they think about them the with the wrong hat on, effectively. Um they're not thinking about their risk hats. So our defensive assets, as you mentioned, what's the goal of our defensive assets? It's not return isn't our primary driver there. That's in the growth assets. We're thinking about um, you know, how good are insurance policy are these asset classes? Are they going to be for be there for us when our growth assets are misbehaving? Are they going to be able to match our short-term liabilities, those things that are happening in the next three, five, seven years for us with near certainty? Um and when you when you look at the goals of the defensive assets, something like emerging market bonds or high yield bonds, they fall down very, very quickly. Um and actually they're they're growth assets. They're not they're not defensive assets, they're growth assets. And therefore, if you're measuring high yield bonds, emerging market bonds against equities, they're always going to lose on a on an expected um return basis. So, you know, that portfolio role then becomes meaningless. You're taking out highly diversified uh portfolio of equities and replacing it with emerging market debt. Um so yeah, it it it's um it's a good point, Jonathan, and it's it's having that, always having that risk-based hat on and um risk and goals-based hat on will will really be the key to guiding you through these decisions.

SPEAKER_00 45:37

Yeah, yeah. And you know, you and I have talked about it before, and perhaps clients and or investors, um people watching, listening to this podcast have probably heard or maybe heard, you know, that asset allocation is a key driver of returns, and more so it's asset allocation that matters rather than trying to um you know stock pick, if you like, and and and build a portfolio with a small number of um uh equities that you've made judgment to invest in or or decided that that you should invest in. But why is owning thousands of companies across different regions and different um sectors, why is that so powerful, James?

SPEAKER_01 46:29

It's because ultimately diversification is your best friend in investing. And there's a really good exercise we do at Albion. And every single year, without question, if you're a reasonable-sized investment manager or asset manager with products out there, you release, probably release a market outlook for 2025, for 2024. You know, that you can go back through time and and look at them, go back to the end of last year, um, you know, set that criteria on Google or or ask Chat GPT these days to say, find me these 10 managers market outlook for 2020 to for 2026, save them somewhere, and then at the end of 2026, go back through them and look at who was who was correct and who wasn't. You know, almost by definition, half of them are right and half of them are wrong because markets work pretty well. Uh, and so those views are already embedded in the market price through time. So, you know, one of your key, key tools, particularly in the short term, is is being highly diversified. And you only have to look at you know the last few calendar years to see that. Um US stocks have been the driver of returns for some time now, um, since the financial crisis, the likes of the big tech companies, the apples, the Amazons, the Teslas, they have have dominated markets for 15 years. But you know, in the last couple of years, it's been emerging markets that have really taken the throne. Um, start of 2025, um, emerging markets absolutely dominated last year, and again, they've they've had a great start to this year. So um if you're not highly diversified and you don't you don't take that really highly diversified risk-based approach, you know, you risk effectively missing out on the winners of tomorrow um uh uh and anchoring yourself to to the winners of of yesterday. Um and I will just say a really nerdy but cool exercise is um we have a chart at Albi that we really like, which is the the top 10 stocks at the start of each decade. Um we've got a few more years to to wait to update it for the next uh for the next decade. But you you go back and look at that from the start of 2020, and it is you know big tech. You go back 10 years before, and and it's a mixture of of big tech and uh you know some other names that have kind of uh whistled away. Um you go back to the start of 2000, um uh and and it's different names. You go back to the start of 1990, it's uh the you know the banks and the energy firms, 1980s, it's Japanese stocks. So it it changes so much through time. And uh and you know, you only have to go back 20 years, and you know, Facebook, um Facebook had it was was basically in its infancy, Google hadn't really listed yet, um Amazon was a bookstore, um, Tesla didn't exist, um Microsoft was out there, Microsoft was probably the exception, Apple was was you know something like 400th in the in the Fortune 500. Um those companies we need to identify them today, and the way that you guarantee that you're gonna benefit from whoever those companies are over the next 20 years is you start by being highly diversified.

SPEAKER_00 49:58

Yeah, yeah. So you're so you're not uh left behind, as it were.

SPEAKER_01 50:04

Exactly, exactly. I probably went off on a few tangents there, so sorry.

SPEAKER_00 50:09

No, that's okay. Um, no, absolutely. I you know, I think there's a um you know that matrix where you see um you know the chart that represents the developed market of um 25 countries or so, and you go back 20 years and the top of every year you can see uh you know the the top performing country in any years just seems to be different for you know for a 20-year period. And looking at the chart just looks like a patchwork quilt because each country is represented by a different colour, and and it's the same for emerging markets. I think there's 21 countries or so in the emerging market space, and you look at the 20 years, and again, there's just no way of determining which country is going to be the top performer or above the above average performer in any one year, and it's you just need to be diversified. It's it's it's as simple as that. It's um and I think actually it's those sort of charts which explain or highlight the importance of diversification and actually the futility in trying to speculate, um, certainly in my in my humble view, you know. Um tell me one of my favourite charts, that one. Yeah, I mean tell tell me, James. I mean, uh we talked earlier about um you know, Wells Gibb Wells Gibson, we're strong advocates of systematic investing as opposed to active or judgmental investing. Um, and and for good reason. We really do believe in the structural integrity of the portfolio. Um I remember when I started on this journey w when my eyes were opened to the world of systematic investing and being told three things matter when it comes to investing, Jonathan. Diversify, keep costs down, and ensure you only take risks worth taking. And in in other words, make sure you're that um the your portfolio is characterized by if there is extra volatility or potential volatility in portfolio, make sure that that's worth taking. And we've talked about small companies compared to large companies and lower price value companies as opposed to higher price growth companies, um, take the risk worth taking. But focusing on cost uh uh alone, uh just just for the viewers and listeners, why is this so important um over a long-term period, say 20 years, and and does being systematic reduce that unnecessary friction?

SPEAKER_01 52:51

Definitely that's uh a key part of the two sides of the industry, or a key characteristic of the two sides of the industry is keeping costs low. And you will tend to find on the judgmental side much higher costs, like it's a more hands-on approach. You've got more um, you know, big research teams crunching the numbers all all the while, and um you're you know paying for the latest and greatest machine learning algorithms, the AI trading uh platforms, all that good stuff. Um, and that you know has to be paid by someone, and and ultimately that's paid by the end investor. Um, you don't have a lot of that on the systematic side. Um, index funds uh and broadly systematic funds these days, you know, you're you you can really build a very highly diversified, sensible portfolio for um you know 15 to 25 basis points, 30 basis points maybe, depending on your preferences. Um so costs matter. Jack Bogle, the late great Jack Bogle, um said you get what you don't pay for in investing. And he's absolutely right. Um costs are a definite. There are another few certainties about investing. Um so having a very tight focus on financial costs and emotional costs of uh investing your portfolio is is key. Uh and I will say, despite that, costs aren't everything. And that's again where I think the systematic side of the industry can fall down sometimes because it's it's very much become a race to the bottom and and you know trying to shave a basis point here or there to be the lowest OCF on a on a list of funds. Um, you know, when you're when someone goes away and does a robust screening process, you're looking at a list of highly diversified, really top quality index funds, everyone's kind of racing to be the lowest cost because they know that you know people build a portfolio and they report the OCF figures to end clients, and the lower the number the better. You know, the reality is it's so much it is so much more detailed than that. You can look at three index trackers with exactly the same cost, and they will have pretty vastly different outcomes because of where they're domiciled, what are the tax consequences, um, whether it's an ETF or a fund, what does a securities lending policy look like, um, and and how much of that revenue is given back to investors. I'm talking about things that are probably what far too technical here, but that's why that's why Albin exists. We we do that, we do that work, but but but ultimately you can end up with three index funds that have all got the same price, and they've all got, you know, say 20 basis points differential in their returns, so dwarfing the OCF number. So costs are important, it is crucial to have a focus on costs, but they are not the be-all and end all. Uh, and you have to have that that extra layer of detail when you get down to choosing the best of the best, specifically for your clients.

SPEAKER_00 55:58

Yeah, yeah, and it's probably why when we've coming back to that analogy of the cake and we've picked the right ingredients, we we we've decided this is we want global equities in our portfolio, and we know how much of global equities we want in our portfolio, or emerging market equities for that matter, that um we then have to make sure that the funds that represent that asset class are best in class, and and costs will play a part in that. Um so it it is a it is a rigorous process, isn't it?

SPEAKER_01 56:34

Yeah, it's um sometimes you're sort of going down to the minutiae and you're really looking at it and kicking the tires on it, and and it can it can be a really small decision one way or another. So um, but yeah, you need I can give you, I mean, a if you good anecdote, like we were talking about the patchwork quilt earlier. South Korea was top last year, and they're currently top again this year. They're up something like 200% in the last 18 months or something crazy like that. Um south Korea is defined as developed by FTSE, which is a big index provider. People will have heard of the FTSE 100, um, but it's classed as an emerging market by MSEI, which is another big index provider. So that's a really subtle nuance where two, you know, two index funds, you know, one of them's one of them's got South Korea in it because it classes it as a developed market, and that that's been up 200% in the last 18 months, and the other one hasn't because it classes it as emerging, and it's in the emerging markets fund. So you've not got that really detailed look um at your portfolio in the last 18 months. You know, a a FTSE MSCI developed emerging portfolio looks so different to an MSCI FTSE one because one's doubled up and one's missed out completely. Um, so that's where the screening process that we run with with with you, Jonathan, and and with others is is is absolutely crucial to really get down to that minutiae and make sure clients are at the heart of of those decisions.

SPEAKER_00 58:08

Yeah, absolutely. And and and now thinking about the investor, because we've often said that an investor, an investor is his own worst enemy. Um I mean, what's the um, you know, after after managing costs and and and you know and and being clear about the funds you're using in a in a portfolio, you know, you know, the bigot the the next big risk to us all is is how we manage our emotions, isn't it? And you know, what do you see as the biggest behavioural mistakes that investors make?

SPEAKER_01 58:39

We are ultimately our own worst enemy. It's so true, Jonathan. And no matter how much you read and are passionate about investing, and you know, you absolutely love the nitty-gritty details. I can tell you at Albion, we've got a room full of people that love it at all times. Um, until you've been through a material market crash that we haven't seen in some time now, until you've been through a material market crash, you really don't know much about yourself as a as an investor. And and it's a huge part of what a good financial advisor like yourself does with the end client is keeping them, keeping them on the plan, keeping them focused on their those beliefs, keeping them focused on their goals and preferences, because at some unknown point in the future the stock market will at you know it will tank, it will go down 30, 40, 50 percent, maybe. Um, and you will be left with a portfolio that suddenly lost a huge amount of your life savings. Now, the key is you've not lost anything. You've not lost anything because you don't need that money now, that's why you're investing it. So you're not lost anything until you sold, and that's why you've got your defensive assets there to protect you during those times. But there are, you know, there will always be, and there are a non-zero number of investors that will get to that point in time and they will sell or they will go to the next best thing, they will be um, you know, like they will be sort of wowed by um, you know, the the sort of shiny um beauty parade of a of an active manager and they and they'll move their money. And ultimately, as a cohort of investors, we we we buy high and we sell low on average. Uh, and that's why when you look at the average investor returns versus the market returns, they're always pretty much behind by, you know, depending on the market and depending on the time period, somewhere between 50 basis points and 2%. Um then that's what we often refer to as the behaviour gap. So those investors that can stick to the plan no matter what, and only make changes when there's an exceptionally good reason to do so, a really strong body of evidence um to to do so, um, those are the ones that that you know achieve the market returns through time.

SPEAKER_00 1:01:17

Yeah, yeah. Time time in the market rather than timing the market. I think clearly what matters. James, you and I know um past performance isn't a guide to future performance. Um the regulator would oblige us to tell um investors that and for viewers and listeners um they need to know that. But yet um it's clear that the the the your community of clients, your 75 firms you're working with, are um employing a systematic approach when it comes to investing for their for their clients. Um and your research your research reveals that actually these portfolios have outperformed the vast majority of UK multi-asset funds and managed portfolio services over quite meaningful periods. Is that is that about brilliance or just about consistency?

SPEAKER_01 1:02:26

No, and yeah, it's not no, it's not about um it's certainly not about expert um you know models or superior technology or um you know any of that stuff. It's it's about doing the key things really, really well through time. Um Tim has a line, and I love it, I've used it many, many times with clients, but invest investing is simple but not easy. And you know, there's there's those enduring beliefs that we went through earlier. Once you can get your head around those, you've done, you know, 90% of the work. The extra 10% around value size, profitability, around real estate, around which funds you choose, um, you know, securities lending policies, all that really technical stuff that we've also touched on today, that's gonna add that extra 10%. But if you can get that 90% right and stick with it through time, then you know you're gonna beat the vast majority of investors through time. And and that's really, really powerful. And that's you know, Albion clients are doing that, you know, the chop change, chop change strategy is is you know, we partner with firms that that that are on the same page and have the same philosophy. So there isn't any of that within the community. It's there has to be a very meaningful reason to to make changes. And so when you compare Albion clients looking backwards to the cohort of, you know, as you say, multi-asset funds or or whether it's MPS uh services, there's fewer of them, and and you can't do the comparison quite as well over there. But um but yeah, it's it's the classic systematic versus judgmental, systematic wins on average over time every time, um, you know, almost by definition.

SPEAKER_00 1:04:20

Yeah, yeah, yeah. Very helpful. Um just just some final reflections, James. Um in your opinion, what do you feel the best firms consistently get right when it comes to investing?

SPEAKER_01 1:04:34

Focusing on the evidence and um making sure that every decision really is in the best interest of the end client. It's it sounds simple and it sounds like well, surely everyone does that, but it yeah, it's it's not the case, and and we've we've got a long way to go um, you know, before um before before ultimately that that that is the case. And and um uh and so I I think yeah, the the best firms focus on on those things um uh and you know evidence-based investing, I think that term has become a little bit of a a red herring in a in a sense because uh people say, well, there's evidence for every portfolio, and it's like, well, uh yeah, there is and there isn't. I I I don't agree with that that statement at all. Some evidence is helpful for portfolio construction and some of it isn't. Um and that's the role of the investment committee to work out um, as you say, which route route to go down. Um so yeah, focus on the evidence, put your clients at the center of every decision. I think the best firms are doing both of those things, obviously amongst some others.

SPEAKER_00 1:05:49

Yeah, yeah. And I that's a good point you say, but the the whole evidence based thing has been used more broadly these days, isn't it? And I suppose a judgmental manager. Would probably agree capitalism creates wealth, markets do a pretty good job of giving a return, risk and return related diversification is an effective risk management too. They would probably they would argue with that. I suppose it's it's the practical imperative. It's it's it's what are they practically doing? Um if that's their foundation, what's the consequence for them and how are they then building a portfolio? What ingredients are they using and how are they going about doing it? Um and they're what they're doing is doing it in a judgmental way. Um and then increasing costs and uncertainty and so forth. Um just just to finish up, um and um actually the more I've actually said this to a few other podcast guys, actually, it's only when you you start getting into into the these conversations you actually realise we could have had a mini series around each of these points. But um just just to finish, James, I mean for anyone watching or listening to this episode, what what one principle would you encourage them to hold on to when markets feel uncertain?

SPEAKER_01 1:07:12

Stick to the plan. Stick to the plan would be my guidance for anyone having a wobble when markets inevitably dip, uh, as they will. They did it this year, earlier in the year, they did it last year. Um, they will dip again and again and again by definition. That's why there's a return on offer there. Investing is risky, and that's why there's a return there. But you did not build a portfolio for a six-month period or a one-year period or a five-year period. You built a portfolio to help you through retirement, through um, you know, through the accumulation and through the retirement phase. You built a portfolio for decades, not for a short-term period. So stick to the plan, tune out the noise, don't check your BBC News app too often, don't check your portfolio too often, and um, you know, go enjoy yourself, especially if you're in that retirement phase, because you earned it.

SPEAKER_00 1:08:13

Yeah, thank you, James. That has been a genuinely brilliant conversation. And I had and I say that having had many of them with you over the years, but I think what really comes through today more than anything is just how a coherent, a well-structured investment process can be when it's built on a clear set of beliefs and the discipline to stick with them. James, thank you so much for your time today. As always, your clarity of thinking is something I find enormously valuable and I know our listeners and viewers will too. Really appreciate that, Jonathan.

SPEAKER_01 1:08:49

And uh great to see you. Um enjoy the enjoy the golf this afternoon if you if you do get on the course.

SPEAKER_00 1:08:55

You're not meant to tell the viewers and listeners that. But thank you, and thank you to everyone. Thank you to everyone for listening or watching. If you've enjoyed this episode, please do share it. And if you'd like to learn more about how Wells Gibson approaches investing, or even if you'd just like to have a conversation about your own financial plan, you will find us at WellsGibson.uk um or simply get in touch directly. And until next time, keep thinking long term. Thank you. Thanks so much, everyone. Thanks for tuning in.