10 years ago this month, Tideway created its model discretionary portfolio range.
The models are possible because of our technology set up with our partners AJ Bell Securities (AJBS) and allow us to create portfolios of funds in multiple client accounts that track a single model. If we sell a fund in the model or add a new one, the tech does the same transaction in every client account that tracks that model.
In the terms we have agreed with AJBS our clients pay no fees or commissions on fund switches, buying funds or selling funds and, since the abolishment of commission in 2012, the funds we buy are single priced – there is no bid to offer spread. So, the whole process is friction-free save for the fund fees we all pay to our selected third-party managers.
We could have gone down the ‘fund of funds’ route, which lots of our competitors have done, creating a new fund for each model portfolio, which, in many ways is simpler in technology and execution terms, but comes at an additional cost as the new funds’ admin fees must be paid. Fund of funds are less transparent. If you looked in the portal you would see just one Tideway fund, not all the underlying funds as you do now, and you would not be able to track the performance of the individual funds as we can today.
Crucially, if you wanted to take money out of your account you would have to sell a little bit of everything. If you were in a multi-asset fund, that would mean selling bonds and equities irrespective of market conditions. When we get withdrawal requests, we can select what we sell for clients and hopefully avoid selling equity funds in market down turns.
It’s a bit more effort for us, but we saw the model portfolio solution as better for our clients and it works very well.
The models allow us to track performance. It’s not an exact science compared to a fund of funds performance number for the very reasons above – each of our clients’ portfolios are bespoke based around cash flows in and out, but generally they hug the models.
The Last Decade
10 years ago, we voted for Brexit. Since then we have had a global pandemic, a second Trump presidency, and two major conflicts (Russia/Ukraine and Israel/US/ Iran). Seven Prime Ministers later, what’s changed? (data sources in brackets):
- The price of goods: inflation has been just over 40%, exceeding 5% in 2021 and 2024; many of the inflation increases have been driven by supply shocks after Covid and due to wars rather than demand led (CPI).
- Interest rates: UK base interest rates have gone from 0.25% to 3.75% today and 20-year bond yields have risen from 1.2% to 5.7% as Governments around the world have acted to try and control inflation.
- Government debt: UK Government debt has ballooned almost 90% from £1.6trn to £3trn, a jump of around 50% after inflation, driven by Covid support, support for the cost of living crisis (inflation!), and higher servicing costs as interest rates rose (ONS). US Government debts have more than doubled, jumping from $19.6trn to $40.2trn (Investopedia) jumping around 60% after inflation.
- Economic growth: the UK economy has grown about 50% in nominal value, (around 12% after inflation), the US economy is up 77% in nominal value, about 27% after inflation (Wikipedia).
- UK house prices: are up just 25%, falling c.15% in real value after inflation (Halifax).
- The average deposit investor: has made 25%, losing 15% in real terms (Halifax).
- USD/GBP: the pound has actually increased c.8% versus the US dollar, the pound being particularly unloved after the Brexit vote (Yahoo Finance).
- Third Party Fund Fees: in 2016 we were paying 0.95% p.a. on average to third party managers in our Balanced Multi Asset portfolio. This has dropped by 30% to 0.66% p.a. today.
- Tideway Clients’ Money: in 2016 we were managing £150m of client funds, this has grown fourfold to just shy of £600m today.
10-Year Investment Returns
Corporate Bonds
The rise in yields hit corporate bond returns, and passive investors have had a particularly tough time. iShares UK Core Corporate Bond ETF, which costs 0.2% p.a., has made just 28% in 10 years, averaging 1.75% per year (Morningstar). Many active fixed income managers have done much better. One of our long term funds, Royal London’s Sterling Extra Yield, has returned 90% in the same 10 years, 5.5% p.a. on average charging more than twice the ETF fee.
Equities
The UK FTSE 100 has jumped 57% in 10 years, the S&P 500 has ballooned from 2,150 to 7,630, a 255% increase, buoyed by the spectacular growth in value of US big cap tech stocks (Yahoo Finance). The average global equity fund manager made c.170% versus a low-cost MSCI world tracker returning 230%(AJ Bell). Active managers have tended to take less risk and invest in more diversified portfolios than the MSCI world index has become and have therefore struggled to keep up with the index returns.
This appears to be no longer an issue for some of our selected active mangers now strongly outperforming the index.
Tideway Returns
We have produced a review of the last 10 years’ returns, which you can see here. If any colleagues want to know who you use to look after your money, this is a great document to share.
In short, we have done a pretty good job. We had too few US equities at the start of the 10 years, corrected that and then have rightly diversified again in the last few years. We underperformed in equities the first five years, but have begun to outperform in the last five. In fixed income we have been well ahead. Recognising the risks of the rate reversal we were well positioned in shorter duration bonds (than the index) to weather it. It hurt but we recovered more quickly (than the index) and our medium and lower risk portfolios have done a great job against our peers, passive alternatives like Vanguard and against inflation.
We are agnostic between passive and investment strategies but have always favoured active management in fixed income. We did hold an S&P 500 index fund for several years, but feel the case for active management in equities is stronger now than ever. Nick explains some of why we think this below.
Investment Returns are only a Third of the Tideway Service
We are justly proud of the returns we produced, but also of the administrative service we deliver. We have had a few clients leave Tideway, not to go to another adviser but to do it themselves and save the fee (as AI will encourage you to do!), only to return a few years later admitting it’s more work than they thought. Accumulating funds is one thing, but arranging secure regular cash flows and managing investment encashments is a whole other thing!
Then of course there is the advice around tax and planning. Often hard to quantify, the ability to discuss your investments with a real experienced individual with a forward thinking approach is a key part of what we offer to try and get the big decisions correct.
- How much should I have in what investment assets?
- How do I use my ISA, SIPP and GIA to minimise tax, what should I draw on first and how should they be invested?
- Should I use an offshore bond?
Should I sell my buy-to-lets, what would I do with the cash? - Can I afford to make gifts to my children, how much and when?
These are just some of the questions we are working on with clients daily. We don’t charge hourly rates for this advice, it comes as part of the overall service, and I think we are pretty good at it. Remember you might face some of these issues just once in your life, but we discuss them daily!
Yes, you can get some answers on this stuff now for free from Gemini AI and the likes, but that assumes you know what questions to ask and are happy with a consensus backward-only looking view. Free or cheapest are rarely the best.
A good example of this, which I can easily and quickly quantify, is Defined Benefit pension transfers. In 2016, virtually all our new clients were coming to us for DB transfer advice and invariably, our advice would be “yes, there is a good chance you will be significantly better off and you can afford to take the risk, because of the sheer size of the transfer offer”. I’m pretty sure that if the AI we have today was around in 2016 it would have said the exact opposite: “it’s high risk and you will most likely be worse off”. Certainly, that’s the stance the FCA took based on a consensus view and history, they could not look forward or think outside the historic consensus (this despite their mantra that past returns are not necessarily a good guide to future returns). In a world where mean reversion is a huge factor, this mantra is one of their better bits of work IMHO.
To see how that’s worked out, here are actuaries XPS Groups DB transfer index, the amount paid out on average by DB schemes for £10,000 of annual income.
The interest rates went against us for a bit through Covid, but the transfers secured were so huge and investment returns pretty good, so no one (except the FCA!) worried. But then, as the lettuce out-lived Liz Truss, Tideway’s big picture, forward looking, contrarian view came to fruition.
A client who came to us 10 years ago asking “should I take a £700,000 transfer in exchange for my £30,000 p.a. pension?” now has roughly £1.2m and could afford an £85,000 p.a. pension, versus £40,000 p.a. the scheme would be paying them.
Well worth the advice fee, I would say, and advice I suspect you will never get from a simple AI prompt. Responses to AI prompts today tell you to invest passively, often overweighting equities versus bonds and do it all yourself to minimise fees. You will reduce fees, but our view is you are unlikely to get the best returns, especially after tax without some help and some non-consensus, forward looking advice.
10 Years of Model Portfolios: What Has Changed?
As part of Tideway’s 10-year anniversary of running model portfolios, we have looked back at both the fixed income and equity asset classes to understand how they have evolved over the past decade. In fixed income, we focus on yields and inflation, while in equities we focus on valuations and market concentration. These are among some of the key factors that can help us understand the potential drivers of future long-term returns.
Of course, the future is unknowable, and any attempt to predict returns is subject to significant uncertainty. However, our observations across both asset classes help illustrate why we remain confident in our current allocations.
Fixed Income
The good news is that we now have materially higher starting fixed income yields, and in particular positive real yields in government bonds, which have emerged in the aftermath of central bank responses to structurally higher global inflation brought about by more frequent negative supply shocks (Covid, Wars etc).
Prior to the rise in interest rates from 2022, we had no direct exposure to government bonds in our portfolios, viewing them largely as offering return-free risk. The increase in real yields has led us to reconsider their role. We now use low-coupon UK government bonds as a more tax-efficient cash substitute for clients to hold directly (speak to your Wealth Manager if you are not aware of this option), while also including them as part of our overall asset allocation at the model portfolio level.
Despite higher yields, government bonds still represent a relatively small proportion of our fixed income allocation. This reflects their limited historical ability to act as a hedge in higher-inflation environments, when rising inflation can lead to higher interest rates and falling bond prices. These hedging properties may return in a different economic environment and pay us a real return in the meantime.
The second reason for optimism is that with rates now materially higher and yields providing a more meaningful income and real-yield cushion, the potential for a repeat of capital losses of the same magnitude from further rate normalisation is lower. At the very least, the payback period following a period of weakness should be shorter, with this further supported by our conservative duration positioning, which currently sits at roughly four years.
Year to date, however, fixed income has had a challenging period in relative terms, with portfolios positive but trailing cash following the recent rise in yields. In the short term, pressure on rates remains, with inflation proving stubborn and geopolitical tensions creating the risk of further supply shocks, as we have seen since 2022. Governments around the world are also having to contend with elevated debt levels alongside materially higher debt-servicing costs.
While it is never our preference to underperform, returns from fixed income will not be linear. Importantly, we remain comfortable with our underlying managers: recent underperformance has been driven predominantly by movements in yields rather than a deterioration in the underlying securities they hold. As we saw in 2022, periods of higher yields can also create an opportunity to reinvest at more attractive rates, improving the prospective return from fixed income and laying the foundations for stronger returns over time.
The balance sheets of corporates continue to look strong versus the last decade with the marginal lending over the last 10 years taking place in private markets. This improvement in Credit quality has not been missed by the market however and is reflected by tighter Credit spreads or a lower yield premium versus governments than we saw 10 years ago. All in Indicative Real Yields on Credit continue to appear healthy as the chart below hopefully shows.
Overall, materially higher real government bond yields encourage us that a 2% p.a. real return from our higher fixed income portfolio is a realistic target for the next decade, a percent higher than the last, even though Credit spreads appear tighter versus 10 years ago.
Equities
After a decade of strong returns from the S&P 500 and MSCI World in particular, investors in market-cap-weighted indices must contend with both elevated valuations and a high concentration of capital in US-listed companies and, increasingly, in a relatively small number of AI-related technology businesses. The concentration of the largest companies in major equity indices is now at historically elevated levels.
Historically, periods of elevated valuations and high market concentration have not generally been supportive of prospective long-term returns. When the two have occurred together, there have been periods of weaker real returns, with the extremes of the Dot-com era providing a notable example. However, history also shows that high valuations and concentration can persist for considerable periods, meaning they are better viewed as risks to future returns than as reliable signals of when a market will correct.
We are less concerned about the prospective returns from our equity investments because our portfolios differ materially from the major market-cap-weighted indices. We should not, however, expect to avoid short-term volatility if equity markets correct. Our equity portfolios currently have an active share of around 80% versus the MSCI ACWI Index, reflecting significant differences in both the companies we own and their weights relative to the index. This means we have substantially less exposure to some of the most concentrated areas of the market and greater exposure to opportunities outside the largest index constituents.
This positioning does not insulate portfolios from a broad market sell-off. However, it does mean that our returns are less dependent on the continued performance of the largest companies within the major indices. Given their increasing weight, we believe this provides an important source of diversification within our equity allocation.
What gives us the most comfort, however, is the continued valuation discipline within Tideway’s equity portfolios. While valuations are not as attractive as they were in September 2022, when equity markets were particularly weak, our portfolios currently trade at roughly a 30% discount to the MSCI ACWI on a forward price-to-earnings basis.
For us, the important point is the direction of travel. Our managers have continued to recycle profits from successful investments into new ideas, meaning their opportunity set remains broad and valuation discipline remains embedded across the portfolios. By contrast, market-cap-weighted passive indices naturally increase their exposure to companies as their market values rise, rather than actively reallocating capital from more highly valued companies to cheaper opportunities.
While valuations are not a reliable short-term signal, we are more comfortable with our portfolios’ current valuation levels and believe this reduces some of the risks that elevated valuations can pose to long-term returns.
Whilst returns of the last 10 years have been exceptional in our Equity Income portfolio (CPI +5.7%), especially the contributions from a couple of our managers, it is impossible to project similar returns going forward with a high degree of confidence. To put into context, the long-term evidence from the UBS Global Investment Returns Yearbook, for a globally diversified equity portfolio, indicates that the potential to achieve real returns of around 4% as being more realistic.